Summing Up The Retirement Crisis

May 21, 2014 Leave a comment


Is there a retirement crisis for baby boomers and Gen Xers? “It depends!” says Jack VanDerhei, research director with the Employee Benefit Research Institute in Washington, D.C.  The probability of NOT running short of money in retirement ranges from a low of 17% to a high of 99% depending on three main factors: your pre-retirement income level, what percent of expenses you aim to cover, and whether or not you factor long-term care and home health costs into the picture. For Gen Xers, the number of years of future eligibility in a 401(k) plan also plays a huge role.

VanDerhei summed up 10 years of research on retirement readiness on two Power Point slides reproduced below that he presented at EBRI’s 2014 annual policy forum. While policy experts and members of Congress are struggling to define the retirement crisis and hashing out proposals to fix it, the bottom line is that your retirement is in your hands.

For Gen Xers who are not lucky enough to work for an employer with a 401(K), they only have two chances out of five, or 40%, of having enough retirement wealth to cover 100% of expenses. That jumps to 61% for workers with one to 9 years of 401(k) eligibility, 73% for workers with 10 to 19 years of eligibility and 86% for workers with 20-plus years of eligibility. “They still have significant period of time before retirement to save,” says VanDerhei.  Take advantage of it!

How to improve your retirement readiness

April 28, 2014 Leave a comment


According to Jack VanDerhei, the research director at EBRI, two big factors are at play. One is whether you are eligible to participate in an employer-sponsored defined contribution plan, a 401(k), at work. That, he says, is one of the most important factors for retirement income adequacy. And the second important factor is your income. The more you have, the more likely you won’t run short in retirement. For instance, 86.4% of Americans who have annual income of more than $72,500, the highest income quartile, are projected to have sufficient financial resources in retirement.

Do you have a defined contribution plan at work?

According to VanDerhei, a tad less than one in five (17.2%) Gen Xers with annual income less than $11,700, the lowest income quartile, and no future years of access to a 401(k) plan would have sufficient income in retirement. But more than twice that number, 35.9%, would have sufficient income in retirement if they had 20-plus years of access to a 401(k) plan, VanDerhei says.

His advice to workers who don’t have a 401(k): Consider working for an employer that offers a defined contribution or some other type of retirement plan. Yes, many workers can save for retirement on their own with an Individual Retirement Account. But research shows that most workers don’t, VanDerhei says.

“You probably don’t have much control over which income quartile you’re in but having the advantage of working for an employer that sponsors a defined contribution plan would probably be the best thing to do,” he says.

Early and late Baby Boomers who are projected to run out of money in retirement and who don’t have 20 years of access to a 401(k) plan can also improve their retirement readiness, says VanDerhei. His advice for that cohort: One, contribute to your employer-sponsored retirement, assuming that you have one. Two, contribute at least as much as needed to get the employer’s matching contribution. And three, calculate how much you need to accumulate in your nest egg to be able to retire at your planned retirement age and determine how much more you might need to save to reach that goal.

Early and late Boomers who want to increase their odds of not running out of money shouldn’t be surprised if, as part of this exercise, they have to re-consider their planned retirement age.

What’s your income? The other big factor, all that determines whether you’ll run short of money in retirement is your income. Nearly nine in 10 (86.4%) of those in the highest income quartile are projected to have enough money in retirement while just 16.8% of those in the lowest income quartile will have sufficient assets in retirement.

So what can those who are in the lowest two income quartiles, those who earn less than $31,200 per year, do to improve their odds of not running out of money in retirement? “They have to seriously consider ramping up their current contribution rates if they are going to have any chance of (retiring) by age 65,” says VanDerhei.

VanDerhei also recommends that those who are projected to run out of money in retirement talk with a professional before pulling the trigger. “Let them help you assess your chances of having a successful retirement at your current savings rate,” he says. “There are just too many people who will automatically leave (the workforce) at age 62 or age 65 and then find out in a couple years there’s no way they are going to have enough money.”

It’s better, he says, to work for a couple more years, perhaps at least until your full retirement age, than to it is to re-enter the workforce when you’re in your late 60s or early 70s. “It’s difficult to get back into the workforce,” VanDerhei says.

Are we under-saving for retirement?

April 28, 2014 Leave a comment


Of course, there are serious social problems here. One is that most of the poor don’t save. The poorest quarter of the elderly rely on Social Security for 85 percent of their income, notes economist James Poterba of the Massachusetts Institute of Technology. Another problem: People don’t know when they’ll die. It’s difficult to plan. People who live longer than expected or who spend extended stretches in a nursing home can exhaust sizable savings. Without nursing-home costs, about 90 percent of baby-boom retirees will have adequate incomes, estimates Jack VanDerhei of the Employee Benefit Research Institute. With nursing homes, that drops to about 80 percent.

Rich or poor, workers win if firms prod them to save

January 31, 2014 Leave a comment


EBRI research director Jack VanDerhei found that 86 percent of low-income people with 401(k) plans are doing what they need to do with those accounts to eventually cover a basic bare-bones retirement. In the highest-income group, 83 percent are on course.

The EBRI think tank used a database of 24 million Americans with 401(k) plans and assumed their saving practices will continue for 30 years. Also, those who appear on course will have only enough for basics like food, housing and heat — nothing extra. To provide that kind of retirement, a person puts away enough over a lifetime of savings in a 401(k) to replace 60 percent of what they were earning annually on the job at age 64.

VanDerhei said Americans with 401(k) plans are doing better in building savings now than they were years ago because after 2006, many employers began to provide target date funds — an easy way for people to invest money without being overly cautious or overly risky based on their age. People choose a fund with the year they will retire in the name. Then fund managers invest a lot in stocks when people are young, and as the person ages, they reduce risks by investing less in stocks and more in bonds.

The people who have been pushed by employers through automatic contributions to 401(k) plans are the best positioned for their future. According to the EBRI research, 94 percent of low-income workers and 88 percent of the highest-income quartile with the activist employers will be able to replace 60 percent of their income in retirement. About 85 percent of lower-income people and 73 percent of higher-income earners will be able to replace 80 percent of their pay in retirement.

Social Security, 401(k) Savings Could Sustain Retirement

January 23, 2014 Leave a comment


The analysis from the Washington, D.C.-based Employee Benefit Research Institute (EBRI) finds that, assuming current Social Security benefits are not reduced, 83% to 86% of employees with more than 30 years of eligibility in a 401(k) retirement plan could have sufficient funds to replace at least 60% of their age-64 wages and salary.

When the threshold for a financially successful retirement is increased to 70% replacement of age-64 income, the analysis finds that 73% to 76% of the employee set will still meet that threshold through 401(k) assets and Social Security payments combined. At an 80% replacement rate, the analysis finds that 67% of the lowest income quartile will still meet the threshold if they have had 30 years of access to a 401(k).

Automatic enrollment in 401(k) plans can also play a role in successful saving for retirement. The EBRI analysis examines auto-enrollment with an annual 1% automatic escalation provision and empirically derived opt-outs, and finds that the probability of success increases substantially for employees in those plans, as follows:

  • Between 88% and 94% could potentially achieve 60% threshold;
  • Between 81% and 90% could achieve a 70% replacement threshold; and
  • Between 73% and 85% could achieve an 80% threshold.

EBRI notes that the use of auto-enrollment as a plan feature has grown significantly since the enactment of the Pension Protection Act of 2006.

With regard to Social Security benefits, Jack VanDerhei, EBRI research director, says that such benefits are an integral component of retirement income security, particularly for lower income workers.

VanDerhei, who is also the author of the analysis, explains, “If we assume, as an example, that a proportional 24% reduction would be applied to Social Security retirement benefits for all simulated workers, the percentage of the lowest-income quartile under voluntary enrollment 401(k) plans with an 80% replacement threshold drops 17 percentage points, from 67% to 50%, while the highest-income quartile—which receives less proportionate benefits from Social Security—drops by only 9 percentage points, from 59% to 50%.”

Retirement prospects are fairly good for people with 401(k) plans

January 23, 2014 Leave a comment


The combination of Social Security benefits and 401(k) savings will provide most people with at least 60% of their inflation-adjusted pre-retirement annual income, according to the analysis by the nonpartisan Employee Benefit Research Institute.

More than four in five American workers – between 83% to 86% – are likely to generate 60% or more of their pre-retirement income, the study calculates.

Between 73% to 76% of people will achieve 70% of pre-retirement income, according to the analysis.

Though opinions vary, a general rule of thumb  is that workers need about 70% of pre-retirement income to live fairly comfortably in retirement.

The EBRI study covers people who are eligible for 401(k)s, not simply those who actually participate. But about 73% of workers with access to 401(k) plans take part in them, according to EBRI.

The ability to generate 60% to 70% of pre-retirement income is encouraging considering the often bleak retirement statistics in many other analyses.

“I would think that’s a very different message – a more optimistic message – than has been conveyed” in other studies, said Jack VanDerhei, EBRI research director.


Time to Dump Bonds? Maybe Not

December 16, 2013 Leave a comment


Jack VanDerhei, research director for EBRI, a Washington nonprofit, analyzed data on how early baby boomers invest to estimate how their portfolios would fare in different interest-rate scenarios.

If interest rates, after adjusting for inflation, stay where they are, about 52% of early baby boomers will run short of money in retirement, according to his analysis.

On the other hand, if interest rates jump by two percentage points, only 44.5% of the same group of early-boomer investors will run short, the analysis found.