1 in 2 Baby Boomers born between 1948 and 1954 planning to retire in the first wave of Boomer retirements is at-risk of running out of money in retirement, according to the EBRI Retirement Readiness Rating.
The Rating gauges just how prepared retirees are to finance their lives when they retire. This is defined as the percentage of pre-retirement households at-risk of not having enough money in retirement to pay for basic expenses such as housing, food, shelter, and uninsured health expenses. The net risk is determined as a function of retirement savings such as Social Security, IRAs, pensions, housing equity and other savings, netted out by the forecast of expenses required to live in retirement. EBRI succinctly terms the difference between the savings and expenses as “running short of money” in retirement.
The Employee Benefits Research Institute (EBRI) EBRI says it’s high time to examine the issue of retirement security given that the first wave of 80 million Baby Boomers enters is entering retirement. And most Boomers haven’t saved nearly enough to fund this chapter of their economic lives.
EBRI explains that the pension system in the U.S. has morphed from a defined benefit approach, where employers funded pensions, to a defined contribution paradigm, funded by employees through 401(k) programs and individual retirement accounts (IRAs).
There are 3 tiers of pre-retiree cohorts in EBRI’s analysis:
- Early Boomers, born between 1948 and 1954, now 56 to 62 years old – 1 in 2 of which are at-risk for running out of money in retirement.
- Late Boomers, born 1955-1964, now 46-55 – 2 in 5 of whom are at-risk.
- Gen Xers, born 1965-1974, now 36-45 – 2 in 5 of whom are at-risk.
Health Populi’s Hot Points: Start with the EBRI finding that 1 in 2 older Boomers is at risk for running out of money in retirement. Beyond paying for home and hearth and food, Boomers will be at-risk for covering more health care costs in retirement than they might have anticipated while they were working. Consider the savings side of the equation: traditionally, Americans have relied on a steady uptick in real estate values to count on as a retirement financial cushion. However, the decline of real estate values in the past few years has exacerbated the risk of running out of money in retirement. Furthermore, before the recession few Boomers (and most Americans) were saving money for that rainy day (or retirement). Too many workers haven’t maxed out their contributions in 401(k) plans when they’ve had the opportunity to do so.
So the personal savings component in the Retirement Readiness Rating has eroded in several respects: housing equity, low contributions in 401(k) plans, and generally low savings rates in personal accounts.
Now consider the cost-side of retirement, and focus on health care: if health reform in the form of PPACA does not ‘bend the cost curve’ as it’s envisioned to do, what happens to Medicare? More costs will fall onto the shoulders of retirees, as is already anticipated in many forecasts of the U.S. health care system. If individuals in retirement don’t have money to pay for health out-of-pocket, no amount of adopting the lifestyle of Jack Lalanne, juicing for health, and power-walking at 75 will help avert the funding crisis for Medicare.