Standard of Living May Not Be Sustainable

The National Retirement Risk Index (NRRI) shows that more than half of households may be unable to maintain their standard of living in retirement.

 

This finding is based on newly released Survey of Consumer Finances data. Between 2007 and 2010, the NRRI jumped by nine percentage points because of several factors. The hardest hit households were those nearing retirement and those with high incomes.

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Bursting of the housing bubble (4.5 percentage points). The lower the value of housing, the less a household can extract at retirement in the form of a reverse mortgage, and the lower the interest rate, the more a house can borrow through a reverse mortgage. In the 2007 to 2010 period, nominal interest rates decreased sharply. This decline somewhat offset the decrease in the value of housing by increasing the dollar amount that households can potentially withdraw from their houses in retirement. At the same time that gross housing values fell, mortgage debt—which was very high in 2007—remained virtually unchanged. High levels of mortgage debt relative to the value of housing means that some households will not only be ineligible to take out a reverse mortgage, but will also face substantial mortgage payments during retirement.

Falling interest rates (2.2 percentage points). This means that households get less income from annuitizing their wealth. A retiree with $100,000 will receive $492 a month from an inflation-indexed annuity when the real interest rate is 3% compared with $413 per month when it is 1.5%. The NRRI assumes that three types of wealth are annuitized at retirement: financial assets, 401(k) balances and money received from a reverse mortgage on the household’s primary residence.

This finding is based on newly released Survey of Consumer Finances data. Between 2007 and 2010, the NRRI jumped by nine percentage points because of several factors. The hardest hit households were those nearing retirement and those with high incomes.

 

Bursting of the housing bubble (4.5 percentage points). The lower the value of housing, the less a household can extract at retirement in the form of a reverse mortgage, and the lower the interest rate, the more a house can borrow through a reverse mortgage. In the 2007 to 2010 period, nominal interest rates decreased sharply. This decline somewhat offset the decrease in the value of housing by increasing the dollar amount that households can potentially withdraw from their houses in retirement. At the same time that gross housing values fell, mortgage debt—which was very high in 2007—remained virtually unchanged. High levels of mortgage debt relative to the value of housing means that some households will not only be ineligible to take out a reverse mortgage, but will also face substantial mortgage payments during retirement.

Falling interest rates (2.2 percentage points). This means that households get less income from annuitizing their wealth. A retiree with $100,000 will receive $492 a month from an inflation-indexed annuity when the real interest rate is 3% compared with $413 per month when it is 1.5%. The NRRI assumes that three types of wealth are annuitized at retirement: financial assets, 401(k) balances and money received from a reverse mortgage on the household’s primary residence.

(Cont’d…)

Ongoing rise in Social Security’s full retirement age (1.6 percentage points). By 2001, nearly all households were required to wait until at least age 66 and many until age 67 to receive full benefits. The share required to wait until 67 continued to increase for subsequent surveys. Declining Social Security replacement rates at 65—the assumed retirement age in the NRRI—affect all households but have a particularly large impact on low-income households who depend almost entirely on Social Security for retirement income. According to the 2010 Survey of Consumer Finances (SCF), median 401(k)/IRA balances for households approaching retirement were only $120,000.

Continued low stock prices (.8 percentage points). From the peak of the stock market on October 9, 2007—roughly the time that the 2007 SCF was conducted—until the end of the third quarter of 2010—roughly the time of the 2010 survey—the Dow Jones Wilshire 5000 was down 24%. Relative to long-run expected returns, the losses were even greater. The impact of these losses was concentrated among the top third of the income distribution, which holds 86% of all equities.

“The National Retirement Risk Index: An Update” is available here.

Charles Schwab Expands Mobile Suite

The Schwab Advisor Center iPad application gives advisers access to client data, such as balances, positions and transactions.

 

The app is customized for the tablet format, including large charts that offer insights into daily account movements and scrolling quotes to help advisers track the movements of the indices, stocks and funds that are most important to them.

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Advisers can customize the app by adding stock and mutual fund quotes to the ticker at the bottom of the screen. The new position charts give advisers a performance snapshot of the equity of an account or the position of a mutual fund over the course of a day. The charts also show recent changes in the price of all positions in an account and relative size of the position. Pop-up details for account balances and history allow advisers to access the data they need in one view.

The mobile apps are part of a broader effort to deliver Schwab Advisor Center data where advisers need it. Additionally, advisers’ clients can use Schwab’s mobile apps for iPhone, iPad and Android, as well as Schwab’s mobile website, to keep up with their accounts and to access features like Schwab Mobile Deposit.

“Advisers have told us they’re using iPads to access key client information and custodian websites while away from their desks,” said Neesha Hathi, senior vice president of technology for Schwab Advisor Services. “It’s also becoming common for advisers to load reports and presentations on their iPads so they can use them in client meetings.

More information about the Schwab Advisor Center app for iPad is available on the What’s New video or Schwab Advisor Center mobile. The app is available for download at the App Store.

 

 

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