While a majority of U.S. households have a good sense of whether they are on track for retirement, a sizable percentage of Americans are either too worried or not worried enough about their future financial security, according to a new analysis published by the Center for Retirement Research at Boston College.
High-income households are the most likely to be not worried enough, the research finds.
The analysis, which is based on the newly revamped National Retirement Risk Index, finds those who are not worried enough are more likely to have higher incomes and may misjudge how much their assets could provide.
Notably, various groups are in danger of saving too little, according to the analysis, but even those who do recognize they are in trouble may not act unless prodded.
Overall, some 40% of households are in good shape and know it, according to the CRR, while 20% are in trouble and know it. As such, some 60% of households appear to be well informed about their retirement prospects, the CRR says, leaving 40% flying blind.
Gauging Retirement Risk
As the analysis recounts, the NRRI is based on the Federal Reserve's Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households.
The risk index calculates, for each household in the Fed survey, a projected retirement income replacement rate as a percentage of pre-retirement earnings. It then compares that replacement rate with a target rate derived from a consumption smoothing model.
Those who fail to come within 10% of the target are defined as "at risk."
According to the index, about half of working-age households will not be able to maintain their pre-retirement living standard. Moreover, the readiness pattern continues to reflect the health of the economy, raising the possibility that a forthcoming recession could tip even more American households into the at-risk category.
Specifically, the NRRI rose substantially between 2007 and 2010 as a result of the Great Recession, and then recovered slowly from 2013 to 2019 as the economy produced low unemployment, rising wages, strong stock market growth and rising housing prices.
The improvements in the risk gauge during the recovery were modest, however, due to some countervailing longer-term trends, including the gradual rise in Social Security's full retirement age.
Household Assessments
The Fed survey that is used to construct the NRRI also asks each household to subjectively rate the adequacy of its anticipated retirement income. As the CRR explains, responses to the survey question range from 1 to 5, with 1 being "totally inadequate," 3 being "enough to maintain living standards," and 5 being "very satisfactory."
In this framework, any household that answers with a 1 or 2 considers itself at risk.
"Comparing households' self-assessed retirement preparedness to the NRRI's predictions shows that households across the income distribution underestimate their level of risk," the new analysis states.
