Data & Research November 13, 2018

Half of Households Likely to Face a Retirement Shortfall

Looking at whether retirees will be able to replace 75% of their final-year earnings, the Center for Retirement Research at Boston College found the number of households at risk of facing a shortfall range from 42% to 60%.

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The Center for Retirement Research (CRR) at Boston College, in a new brief, “How Much Income Do Retirees Actually Have?,” took a look at five surveys commonly used to measure the financial resources available to households in retirement.

CRR says one that is commonly used, the Census Bureau’s Current Population Survey (CPS), understates the resources available to retirees. Nonetheless, even using one of the more reliable datasets, its analysis shows that roughly half of households are likely to face a shortfall in the retirement income they will need, CRR says.

The reason why the CPS in prior studies understated retirement income is that it used to define income as money received on a regular basis—not taking into account money held in a 401(k) plan or an individual retirement account (IRA). In 2015, the Census Bureau redesigned the CPS so that it could take these factors into account.

Another dataset commonly used is the Survey of Consumer Finances (SCF). This captures both regular and irregular income and overstates high-wealth households, which are likely to own retirement savings accounts, CRR says. However, this survey is conducted only every three years and samples a small number of people.

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The Health and Retirement Study (HRS) surveys households in which the head is age 51 or older. It collects in-depth information on income, work histories, assets, pensions, health insurance, disability, physical health, cognitive function and health care expenditures. It also asks respondents about different sources of income.

The Survey of Income and Program Participation (SIPP)’s main objective is to evaluate the eligibility of households for federal, state and local government programs and their use of these programs. It is conducted annually.

The Panel Study of Income Dynamics (PSID) is a survey of households that has been conducted since 1968. CRR says it provides valuable information on the long-run dynamics of income, wealth, employment and family structure across generations. However, it does not ask respondents about regular and irregular income. It simply asks how much income was received in the calendar year.

CRR decided to analyze the HRS dataset and whether households would be able to replace 75% of their income in retirement—but CRR decided to define income four different ways. The first looked at final-year earnings. The second averaged the final five years of earnings, excluding any year in which no income was earned. The third looked at a person’s average earnings over the course of their career and indexed them to the Consumer Price Index. The fourth looked at the average wage-indexed career average earnings.

CRR found that in the first instance, 42% of households are at risk of facing a shortfall. In the second, it is 60%; the third, 52%; and the fourth, 57%. “Using the HRS, the replacement rate calculations, under various definitions of pre-retirement earnings, suggest that roughly half of households are likely to fall short of a target replacement rate of 75%. Researchers should feel comfortable using the SCF, HRS, PSID or SIPP to draw conclusions about retirement income. Concerns about the CPS are well-placed, but, fortunately, other measures of retirement income are available.”

CRR’s report can be downloaded from here.

Uncategorized November 13, 2018

Lack of Emergency Savings Intersects Retirement Concerns

The majority of respondents to a Cuna Mutual Group survey feel positive about their prospects for upward wealth mobility; on the other hand, a quarter say they have no emergency savings.

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A survey of more than 1,000 Americans, commissioned by CUNA Mutual Group, suggests many hold an assessment of their financial security that is overly optimistic.

The survey finds that middle class Americans (defined here as those making between $35,000 and $100,000 per year) tend to feel positive about their prospects for upward mobility. When asked to grade the ability of the middle class to achieve the American Dream, the average response was “B-.”

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 Steve Rick, chief economist at CUNA Mutual Group, says the middle class continues to experience stress from the long-term impacts of the Great Recession.

“We’re still seeing middle class families struggle with sticky wages, inadequate liquidity, high debt, insufficient savings and difficulty building wealth,” Rick says. “This population is among the most exposed to an eventual downturn.”

Despite these headwinds, Americans’ outlook is described as “sunny,” and is supported by respondents’ assessment (accurate or not) of their near-term financial security. According to the survey, 62% say they feel somewhat or very confident about their personal financial situation, and nearly half (46%) believe it is very unlikely that they will miss a loan payment over the next one to two years.

“This cautious optimism, however, belies a more troubling financial picture,” Rick says. “More than half of respondents are ill-equipped for an emergency, with 23% saying they have no emergency savings and 30% saying they only have one to three months’ worth.”

Worries about retirement

According to CUNA Mutual Group, few survey respondents feel prepared for retirement, with only 28% saying they’ll be able to retire with financial confidence in their lifetime. In fact, many seem to be more focused on short-term goals: 38% say they feel they’ll be able to buy a new car in their lifetime, and 37% say they’ll be able to travel internationally.

Sentiments among participants generally remained consistent across age, ethnicity, gender and other demographics. However, Millennials showed “significant divergence from overall trends when it came to many of the traditional components of the American Dream.” The survey shows fewer Millennials have prioritized buying a home or starting a family compared with the general population.

“A vibrant middle class is essential to a healthy, functioning economy and nation,” Rick says. “But we’re seeing a troubling picture emerge as their ability to manage their finances in the near term is coming at the expense of the long term. No one can control the economic winds, but the financial industry can provide the resources the middle class needs to break out of the cycle of economic insecurity.”

The 2018 CUNA Mutual Group survey assessed 1,258 U.S. adults ages 18 or older and making an annual income of $35,000 to less than $100,000. The survey was fielded in August 2018. Additional information about the company can be found at www.cunamutual.com.

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