By Cyril Tuohy
Americans have been told they are likely to face a retirement savings gap. But just how wide is that so-called savings gap? And what is causing that gap?
In the aggregate, all U.S. households, where the head of household is between 25 and 64 years old, face a retirement deficit estimated at $4.13 trillion, according to the Employee Benefit Research Institute (EBRI). This number would rise if the Old-Age, Survivors and Disability Insurance Trust Fund were allowed to run dry. That deficit would rise further if Social Security were to be eliminated.
EBRI’s model assumes all workers retire at age 65, and that they immediately begin drawing benefits from Social Security and defined benefit plans (if they have any).
The model also assumes workers begin withdrawals from defined contribution accounts, cash balance plans and individual retirement accounts (IRAs) to pay for expenses and uninsured medical costs that exceed the after-tax income they receive from Social Security and defined benefit plans.
EBRI conducted simulations of savings shortfalls in retirement, and found that the amount of the gap varies by age, gender and marital status. Further, EBRI found that the cost of long-term care, as well as longevity risk, have huge impacts on the amount of the gap.
Among early baby boomers (those born between 1946 and 1955), the amount of retirement savings shortfall is greatest among single women. Single women who are early baby boomers are projected to run a deficit of $62,734. On average, single men in the early baby boomer age group are projected to run a retirement savings shortfall in 2014 dollars at age 65 of $33,778. Early baby boomers who are married are predicted to have a deficit of $19,304, the simulation found.
Retirement savings shortfalls rise, however, when modeling only those situations in which people face a deficit.
Among those with a deficit, single men who are baby boomers are projected to be short $93,576, single women are predicted to run short by $104,821 and a married household short by $71,299, the EBRI analysis found.
Shortfall averages for late baby boomers (those born between 1955 and 1964) in deficit vary from $76,222 to $102,287. For Generation X, the shortfalls range from $82,083 to $129,861, the research found.
The game changes when nursing home and home health care costs are taken out of the retirement savings model. Without factoring these costs into the model, a single male early baby boomer is expected to have an average present value shortfall of only $10,210, a single female early boomer a shortfall of $25,779 and a married household a shortfall of only $3,511.
Those shortfalls only decrease for late boomers — born between 1955 and 1964 — and Generation Xers — born between 1965 and 1974 — when nursing home and home health care costs are removed from the model.
“Overall, ignoring nursing home and home health care costs decrease the retirement savings shortfall by an average of 74 percent,” wrote Jack VanDerhei, director of research for EBRI and author of the report.
In a follow-up interview with InsuranceNewsNet, Vanderhei said that many retirement models ignore nursing home and long-term care costs, and therefore underestimate shortfalls. “This is our way of showing just how much of a difference it makes to do it right,” he said.
An estimated 76.4 million baby boomers live in the U.S., according to the Population Reference Bureau. The leading edge of the boomer generation — those born in 1946 — began turning 65 in 2011.
EBRI, a nonpartisan research organization, publishes some of the most specific statistics on retirement deficits because it extrapolates results from a database of 24 million 401(k) participants and 20 million IRA holders.
The latest research, based on EBRI’s Retirement Savings Projection Model (RSPM), gives policymakers a snapshot of the specific savings gap that different demographic groups of Americans are likely to face in retirement. The Retirement Savings Shortfall (RSS), estimates the size of deficits that households are simulated to generate in retirement.
Public policy debates discuss shortfalls in the aggregate, but datasets rarely illustrate shortfalls by age, marital status and gender.
While the shortfall simulations assume retirement at the age of 65, millions of Americans say they plan to continue working past 65, either as a way to generate income or to remain on employer-sponsored health care.
Studies show that many Americans have not saved enough for the retirement living standard many envision for themselves and one of the ways to make up that deficit is to work longer.
Rising account values also make a difference, though that difference is puny even when the Standard & Poor's 500 index soared 30 percent in 2013.
Using a measure called a Retirement Readiness Rating, or the probability that people will either have enough or face a deficit, EBRI found that between 2013 and 2014, retirement readiness had increased by less than 2 percentage points.
Early boomers had increased retirement readiness by 1.6 percentage points to 56.7 percent, late boomers by 1 percentage point to 58.5 percent, and Generation Xers by 0.5 percentage points to 57.7 percent, the research found.
VanDerhei said that qualified longevity annuity contracts (QLACs), which allow retirees to defer required minimum distributions past age 70½ , will have “a huge impact on people” because people don’t know how long they are going to live.
Average savings shortfalls range from $7,188 for early baby boomers belonging to the earliest relative longevity quartile to $81,811 for early boomers in the latest relative longevity quartile.
“People don’t know what quartile they will end up in and that’s exactly the point of QLACs and annuities,” he said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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