Higher-income households are most likely to underestimate their risk, and many overestimate income potential from housing and non-retirement assets. Image: Gts/Shutterstock.com
Many households underestimate their risk that their finances in retirement will be insufficient to maintain their standard of living, says a report from the Center for Retirement Research.
Under a “national retirement risk index,” someone is deemed to be at such risk if they would not come within 10 percent of a target amount needed, assuming they turned all of their assets including home equity into an annuity income stream. Just above half of households fell into that category over 2010-2013—due to the impact of the Great Recession—while the figures have been in the 47-48 percent range in more recent years.
The same survey used to calculate that index also asks respondents to rate their own level of risk. It found that in the years up to 2013 they estimated their risk as higher than the index reflected—meaning they were more pessimistic—but that since then they have under-estimated their risk.
“Interestingly, higher-income households are most likely to underestimate their risk,” it said. For example, while the 50 percent in the lowest third of income who considered themselves at risk was six percentage points below the rating produced by the index, the 17 percent in the highest income third who considered themselves at risk was 24 points below the index’s assessment.
Thirty-three percent of those in the middle third of income consider themselves at risk compared with the 45 percent figure in the index.
One possible reason, it said, is that “households are more optimistic about the amount of income their housing and non-retirement assets can provide” than the index indicates. “Their overconfidence may lead them to underestimate possible risks,” such as those from poor investment results, it added.
Demographics also play a role in how concerned people are about their retirement finances, it said. Among indicators of a high level of concern are being averse to investment risk, those who are married in a one-earner household, and those who consider themselves as having a low level of financial knowledge.
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