The Center for Retirement Research (CRR) at Boston College released earlier this month its biannual National Retirement Risk Index (NRRI) report that adds long-term care expenses to the Index calculation. The addition produced another increase in the number of working Americans who may not be financially prepared to retire and increased the index number by three percentage points from 61 percent to 64 percent. The National Retirement Risk Index, developed by the Center for Retirement Research at Boston College and underwritten by a grant from Nationwide, is updated twice annually. The Index is a percentage measurement of how many working-age American households are ‘at risk’ of being unable to maintain their standard of living in retirement. According to the Index, ‘at risk’ means a household would be unable to maintain its pre-retirement standard of living in retirement. The amount of money people need while retired compared to pre-retirement varies but has been estimated to be from 65 to 85 percent, depending on household income and marital status. The percentage is higher if the costs of health care and long-term care are explicitly taken into account.
“Explicitly including health care in February 2008 raised the original Index from 44 percent to 61 percent,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “And including the cost of long-term care insurance now raises the Index to 64 percent. Because the costs of long-term care insurance and other health expenditures are rising and the income system is contracting, these latest findings raise major concerns about the retirement security of baby boomers and succeeding generations.”
“The Index uses a projection of how much income households are expected to have in retirement relative to their pre-retirement income,” Munnell said. “This ‘replacement rate’ is then compared to a target rate that would allow a household to maintain its pre-retirement standard of living. Households that fall more than 10 percent short of the target are considered ‘at risk.’
“This estimate assumes that people work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes,” Munnell said. “More realistic assumptions regarding earlier retirement and the reluctance of people to annuitize their 401(k) balances or tap housing equity would put the percentage of workers ‘at risk’ considerably higher.”
The full report is available from the Center for Retirement Research at Boston College.