About two-fifths of today’s households will not have enough retirement income to maintain their pre-retirement standard of living. Image: TimeShops/Shutterstock.com
By: FEDweek StaffThe latest version of a closely watched index of those who are at risk of not being able to maintain their standard of living in retirement showed a sharp decline over the prior assessment of three years before, but the figures reflected short-term developments related to the pandemic that may not last, an analysis says.
A report from the Center for Retirement Research notes that the National Retirement Risk Index fell in 2022 to 39 percent, about down to the levels of 2004-2007 after being in the 47-51 percent range in the intervening years. “Despite a global pandemic and economic disruption, household finances were buoyed by unprecedented fiscal support, a strong labor market, and considerable growth in the housing and stock markets,” it says.
The index involves projections of retirement income, taking into account factors such as 401(k)/IRA balances and other financial assets and the value of a home, and projecting a value if they were converted into an annuity, the report says. Added to that are benefits such as Social Security and the value of defined benefit retirement programs, and if the resulting figure falls more than 10 percent below the target for maintaining a pre-retirement lifestyle, the household is considered to be at risk.
Said the report, “A unique factor that improved projected retirement finances for many households was a dramatic spike in personal saving during the pandemic, fueled by the federal stimulus spending. Personal saving rates jumped from roughly 7 percent of disposable income to over 30 percent pandemic.”
Home prices also surged, by about 22 percent, during the 2019-2022 period, which has a major impact on the index because it assumes the value of a home would be turned into income in the form of a reverse mortgage. Further, despite stock market losses of 2022, stock values increased by more than 20 percent over the period. (It added, though, that those gains were “concentrated in the top third of the income distribution, which holds about 87 percent of all equities. This pattern means that much of the gains went to households that were already not at risk.”)
While the positive impact on the gains in stock markets may be long-lasting, “Personal saving rates have returned to pre-pandemic levels and so has credit card borrowing. Thus, it appears that households are spending some of the additional savings they built up since 2019.9 Thus, one would not expect new savings to be a major contributor to improved retirement readiness over the next three years.”
Further, “The biggest factor driving the improvement in retirement finances is growth in the housing market. But most households do not tap their home equity in retirement and home prices may not remain at historically high levels,” it says.
“The bottom line is that even a conservative estimate shows a substantial portion – about two-fifths – of today’s households will not have enough retirement income to maintain their pre-retirement standard of living,” it says.
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