More than half of working age Americans risk facing a lower standard of living during retirement, a new study by the Center for Retirement Research at Boston College found.
But even more surprising, many people believe they’re on track for a secure retirement when in fact they aren’t. Conversely, many who are doing well are worried they will fall short during their golden years.
The study found that 52 percent of working-age households in 2013 were at risk of being unable to maintain their standard of living in retirement, up from 30 percent in 1989 and 45 percent in 2004.
“This pattern of increasing risk reflects the changing retirement landscape,” the authors wrote. “The length of retirement is increasing as the average retirement age hovers at 63 while life expectancy continues to rise. At the same time, replacement rates are falling for several reasons. First, at any given retirement age, Social Security benefits will replace a smaller fraction of pre-retirement earnings as the full retirement age rises from 65 to 67 and Medicare premiums take a larger chunk.
“Second, while the share of the workforce covered by a pension has not changed over the last quarter of a century, coverage has shifted from defined benefit plans to 401(k) plans. In theory, 401(k) plans could provide adequate retirement income. But individuals make mistakes at every step along the way, and the median 401(k)/IRA balance for household heads approaching retirement in 2013 was only $111,000. Finally, interest rates have declined dramatically, which means that households receive much less income from their accumulated wealth.”
Some ‘Not Worried Enough,’ Others ‘Too Worried’
The authors found 57 percent of the households had a realistic idea of whether they were adequately prepared for retirement, but more than four in 10 households were mistaken in terms of how prepared they are.
The researchers found 19 percent of households were overconfident, believing they were on track for a secure retirement when in fact they were at risk of having to lower their living standard after retiring. The authors described this group as “not worried enough.” This group may suffer from a “wealth illusion,” believing that what appears to be a large balance in a 401(k) plan will help ensure a comfortable retirement. For example, a $100,000 401(k) balance may seem like a lot of money to many people, but it only provides about $400 a month in retirement income.
“The real danger in terms of misperceptions is being in the ‘not worried enough’ group,” the authors wrote. “The key drivers here are having a defined contribution plan and being in the high-income group. As noted, 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 percent of households that do not recognize that they are at risk are unlikely to undertake remedial action. 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 balance.”
Meanwhile, the study found 23 percent of households are “too worried” about being able to generate sufficient income in retirement, although CRRBC’s projects suggested they were on a course to maintain their pre-retirement standard of living.
“And while being ‘too worried,’ or better prepared than you think you are, may not be quite as problematic, it too has a downside: You may end up saving more of your income during your career than is necessary, which in turn may prevent you and your family from enjoying life as much as you could during your working years,” Walter Updegrave wrote in a Time article.