The Center for Retirement Research at Boston College is out with the latest National Retirement Risk Index, which is exactly what it says, a measure of the overall retirement readiness for American households.
More specifically, it uses the Federal Reserve’s 2016 Survey of Consumer Finances (SCF) to compare “projected replacement rates—retirement income as a percentage of pre-retirement income—with target rates that would allow households to maintain their living standard and calculates the percentage at risk of falling short.”
So how did this year’s index fare?
“Since the last SCF was conducted in 2013, the U.S. economy enjoyed a period of low unemployment, rising wages, strong stock market growth, and rising house prices. These factors should have improved households’ preparedness for retirement,” Alicia Munnell and the CRR team report. “At the same time, longer-term trends—such as the gradual rise in Social Security’s Full Retirement Age and low interest rates—served as headwinds that made it more difficult to achieve retirement readiness. The question is, what is the net impact of these disparate factors?”
It then answered with the following four findings:
- Between 2013 and 2016, the National Retirement Risk Index improved modestly, dropping from 52 percent to 50 percent of working-age households.
- The improvement was driven mainly by rising home prices, with stock market gains also contributing.
- At the same time, Social Security’s rising “Full Retirement Age” and declining interest rates served as a headwind against greater progress.
- The bottom line is that retirement security remains a major challenge that requires today’s workers to save more and/or work longer.
The NRRI was originally created using the 2004 SCF, the center explains, and “has been updated with the release of each subsequent survey.”
Index construction involves the projection of an income replacement rate, constructing a target replacement rate and comparing both to estimate the percentage of households the CRR defines as “at risk.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
