Top 4 Risks for Baby Boomer Retirement

2. Replacement rates are falling – Replacement rates – retirement benefits as a percent of pre-retirement earnings – are falling for a number of reasons. First, Munnell notes, at any given retirement age, Social Security benefits will replace a smaller fraction of pre-retirement earnings as the full retirement age rises from 65 to 67. Second, while the share of the work force covered by a pension has not changed over the last quarter of a century, the type of coverage has shifted from defined-benefit plans, where workers receive a life annuity based on years of service and final salary, to 401(k) plans, where individuals are responsible for their own saving. In theory, 401(k) plans could provide adequate retirement income, but individuals make mistakes at every step along the way and the median balance for household heads approaching retirement is only $78,000. Third, most of the working-age population saves virtually nothing outside of their employer-sponsored pension plan.

3. Out-of-pocket health costs are rising – Out-of-pocket health costs are projected to consume an ever greater proportion of retirement income.

4. Returns have declined – Asset returns in general, and bond yields in particular, have declined over the past two decades so a given accumulation of retirement assets will yield less income.

She concludes that it is important to note her research is based on conservative assumptions. 

"Everyone is assumed to retire at 65; they don't, they retire earlier," she writes.  "Everyone is assumed to tap the equity in their home through a reverse mortgage; only a fraction of those eligible elects this option. All financial assets are assumed to be annutized so that retirees gain the maximum income from their assets; in fact, annuitization is rare; in short, [we] probably understate the challenges ahead."