A new analysis by the Center for Retirement Research at Boston College finds more Americans are either “too worried” or “not worried enough” about retirement.
The report uses calculations from the updated National Retirement Risk Index (NRRI), which tracks the percentage of U.S. households that are at risk of maintaining their standard of living throughout retirement by utilizing data from the Federal Reserve’s Survey of Consumer Finances (SCF), a triennial report.
Findings show that households across income distributions, including low, middle, and high, underestimate their level of risk. While about one-third of households self-report being at risk, the NRRI estimated close to one half are actually at risk of not maintaining their standard of living. Higher-income households, surprisingly, were most likely to underestimate their risk tolerance.
The research attributes the misjudgment to a change in questions by the SCF. Before 2016, households were asked to assess their retirement income from Social Security, employer pensions, and 401(k)s or individual retirement accounts (IRAs). After 2016, households were asked to consider all sources of retirement income, which could possibly include housing wealth and other assets.
Generally, the findings report that 40% of households are in good shape and know it, while 20% are in trouble of risking their current status of living in retirement.
In previous findings, the Center for Retirement Research reported that nearly half of individuals in the U.S. will not have saved enough to maintain their income in retirement, even if they work to age 65, annuitize all of their financial assets, and include receipts from a reverse mortgage on their homes.
Rather, continuous retirement savings coverage can ensure workers accumulate enough resources to maintain their standard of living throughout retirement, the report explained.
Levels of worry
The index also analyzed the levels of worry among U.S. households, using factors such as retirement plan participation, account balance, homeownership and housing wealth, risk aversion, self-assessed financial knowledge, education, household type, race/ethnicity, and age.
The findings show that 28% of individual households are “not worried,” when the NRRI believes they should be. Fifteen percent, on the other hand, think they will fall short of retirement savings, but the NRRI predicts they will not.
High-income households were the most likely to not worry enough, while low-income households were likelier to be “too worried.” Fifty-seven percent of U.S. households correctly rated their risk, with 19% accurately rating themselves “at risk,” and 38% “not at risk.”
According to the research, households that were overly optimistic about economic recovery after the 2008 Great Recession, or overestimated how much income their assets could offer tended to not worry enough about their retirement risk.
“It is not surprising that households with higher housing debt-to-asset ratios, relatively low asset balances in 401(k)s and other defined contribution (DC) plans, and two earners but only one saver were more likely to be “not worried enough,” the Center for Retirement Research at Boston College wrote.
Unlike those who were optimistic, individuals who were “too worried” were likely to be unaware of how much income they would have in retirement and may have less assurance in the asset markets.
“Characteristics that capture these factors – such as risk aversion, married one-earner households, homeowner, and low self-assessed financial knowledge – predicted households’ likelihood of being “too worried,” according to the analysis.
The research concludes that even with a correct prediction of their retirement risk, U.S. households are still in need of retirement planning education, advice, and assessments, in order for them to take action with savings.
“…Classifying households by the accuracy of their perceptions about retirement security does not answer the question of whether they are likely to take remedial action,” concluded the report. “Households that are “not worried enough” are the least likely to change their saving or retirement plans. This group accounts for 28 percent of households, so a significant portion of the population needs to get a better assessment of their retirement income needs. The additional one-fifth of households that do understand their plight may need less convincing to act, but they still must act.”
SEE ALSO:
- 7 Demographic Disparities Impacting Retirement Readiness
- Retirement Readiness a Guessing Game for Most Investors
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
