Retirement & Financial Planning Report

While there are various ways of measuring whether people will have adequate income in retirement, two key issues must be taken into account in addition to standard mathematical formulas that focus on replacing a certain percentage of current income, according to the Center for Retirement Research.

It noted that different studies have produced “conflicting assessments” of whether working households will have adequate income for retirement. For example, one measure, of the amount of accumulated wealth versus current income, has declined over the last 30 years, although when payable benefits such as Social Security and retirement annuities are taken into account, preparedness has held about steady.


Even holding steady might not be enough, since several factors are at work arguing for greater retirement savings today than in the past. These include rising life expectancy, the increase in the eligibility age for full Social Security retirement benefits, the overall shift from defined benefit to defined contribution workplace plans, and rising out of pocket health costs, it said.

In terms of assessing whether someone’s retirement income will be adequate, it said, one key question is how spending will change after retirement. For example, one household may plan a relatively steady level of spending throughout retirement while another might assume higher spending earlier in retirement and less later on. That would provide two different pictures of preparedness.

A second issue, it said, involves those currently are spending to support children—and when that ends, whether they save the difference or boost spending on themselves. Thus, current spending might be artificially high and once spending on children stops, a truer picture of retirement income needs will emerge.

“Will people accept declining consumption in retirement or do they prefer steady real consump-tion? Do parents cut back on consumption when kids leave, or do they spend the slack in their budgets? No one really knows the answers,” the study said. “Spending does decline as people age, but it is unclear the extent to which this pattern tracks declining income; people cannot spend what they do not have. How households react when the kids leave is also not well understood.”