Retirement & Financial Planning Report

Those approaching retirement today need to be even better prepared for retirement than did prior generations but as measured by one key indicator they are less prepared, according to a study by the Center for Retirement Research at Boston College.

The study focused on the “wealth-to-income ratio” which it called a good indication of the extent to which people can replace their pre-retirement earnings in retirement. Overall, it said, for those age around 60, average wealth is about four times average income; in comparison, for those around age 20, average wealth is only a small percentage of income.

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The study noted that the most recent year included in the study, 2010, showed an overall drop in the ratio for all ages, but said that even the more stable rates of wealth accumulation through 2007 before the downturn hit “should not be a source of comfort” because of several factors that mean people need higher wealth relative to income than in the past.

One reason is increased life expectancy, meaning that savings must last longer. The report said for example that between 1983 and 2010, life expectancy at age 65 rose by 3.5 years for men and 1.8 years for women, to 18.6 and 20.7 years, respectively.

Another reason was the increase in health care costs: as one measure, the cost of Medicare premiums relative to the average Social Security benefit has more than doubled in that time, to 17 percent. Meanwhile, interest rates have fallen, so that a given amount of wealth will now produce less retirement income.

Another factor was the decrease—which has not applied to federal employment—in availability of defined benefit retirement programs. In 1983, 62 percent of workers with pension coverage had only such plans and 26 percent had both those plans and defined contribution plans. But in 2010, only 19 percent had only a defined benefit plan and only 13 percent had both types. The figures do not include the growing numbers of non-federal workers who do not have any type of pension plan.