Tuesday, January 26, 2016

Are we saving enough for retirement? USA

Over the next few days, I will be looking at this question for a number of countries in the world. It is interesting to see how my generation is preparing for the next phase of our lives. So today I will look at the USA

In the USA The short answer appears to be No

Here is something every non-rich American family should know: The odds are that you will run out of money in retirement.

On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances.

That is not nearly enough. In addition, the situation will only grow worse.

The Center for Retirement Research at Boston College estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement, even if the members of the household work until 65, two years longer than the average retirement age today

Today’s working households will be retiring in a substantially different environment than their parents did. The length of retirement is increasing as the average retirement age hovers around 63 and life expectancy continues to rise. At the same time, replacement rates are falling because of the extension of Social Security’s Full Retirement Age and modest 401(k)/IRA balances. According to the 2013 SCF, median 401(k)/IRA balances for households approaching retirement were only about $110,000. Yes, the stock market was up and housing prices had begun to rebound, but these positive developments were not enough to return the Index to pre-crisis levels. 

The NRRI shows that, as of 2013, more than half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 – which is above the current average retirement age – and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes. 

The NRRI clearly indicates that many Americans need to save more and/or work longer.  Using a different, more complex model, the Employee Benefit Research Institute calculates that 83 percent of baby boomers and Generation Xers in the bottom fourth of the income distribution will eventually run short of money. Higher up on the income scale, people also face challenges: More than a quarter of those with incomes between the middle of the income distribution and the 75th percentile will probably run short.

The Employee Benefit Research Institute  provides new results showing how many years into retirement Baby Boomer and Gen Xer households are simulated to run short of money, by preretirement income quartile.

Under a variety of simulated post-retirement expense scenarios, the lowest preretirement income quartile is the cohort where the vast majority of the retirement readiness shortfall occurs, and the soonest. When nursing home and home health-care expenses are factored in, the number of households in the lowest-income quartile that is projected to run short of money within 20 years of retirement is considerably larger than those in the other three income quartiles are combined.

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