Economic Pickup Shows Little Retirement Impact

Analysis from the Center for Retirement Research (CRR) shows strong equity returns and modest housing price increases since 2010 have done little to improve most Americans’ retirement outlook.

In an issue brief titled “Will the Rebound in Equities and Housing Save Retirement?,” researchers examine whether the inflation-adjusted 45% return on stock market investments observed since 2010 has improved the National Retirement Risk Index (NRRI). The NRRI, published triennially by the CRR, measures the percentage of working-age American households at risk of being unable to maintain their pre-retirement standard of living when exiting the work force.

The brief also examines what impact the 6% increase in housing prices, measured since 2010, has had for Americans’ retirement readiness.

Put simply, researchers found that neither housing price improvements nor strong equity market returns have significantly improved retirement readiness as assessed by the NRRI. In 2010, the index stood at 53%, meaning more than half of all American households were considered at risk of losing their standard of living in retirement. If the index were recalculated today, using 2013 economic data, it would only fall three percentage points to hit 50%.

Researchers point to a number of factors for the low correlation between market returns, housing prices and retirement readiness. Most prominent is the fact that the more robust growth observed in stock market investments in recent years has mainly benefited the top third of households by income—those starting with higher levels of retirement readiness.

In fact, the issue brief shows only a small fraction (2%) of the wealth of low-income households and only 6% of the wealth of those in the middle-income group are tied into the stock market. That’s compared to about 17% of total wealth for households with the highest incomes.

Also important is the fact that housing price increases were too modest to have a significant impact on the NRRI. In the NRRI, housing prices have a significant impact because households are assumed to access home equity at retirement by taking out a reverse mortgage. The higher the home value, the more a household can extract in cash and turn into an income stream through annuitizaiton.

More information on the issue brief and the underlying research is available here.