Ready to retire at 70 -- or 84?
August 31, 2012
While the National Retirement Risk Index (NRRI) published earlier this year by Boston College reported that the vast majority of Americans will be able to retire comfortably by age 70, a new analysis says that assumption is flawed.
The report, which the Employee Benefit Research Institute (EBRI) released this week, compares the NRRI predictions to the EBRI's own Retirement Security Projection Model. According to the EBRI, the NRRI methodology ignores important factors, and workers considered at-risk might actually have to work until age 84 to have the retirement funds they need.
Why the EBRI disagrees with the NRRI
The EBRI claims that the NRRI is based upon outdated wealth-to-income patterns. The NRRI used data from 1983-2007 Federal Reserve Surveys of Consumer Finances to form its projections, while the EBRI says its data have been updated based on recent trends in 401(k) and savings rates.
In addition, the NRRI and EBRI have different definitions of when a household will be ready for retirement. The EBRI says its retirement model takes additional measures to determine the amount of savings retirees will need to retire securely.
To make its calculations, the EBRI looked at factors related to:
- Investment risk
- Possibility of catastrophic health care costs, such as nursing home care
The NRRI findings relied solely on replacement income figures to determine retirement readiness. That meant that once households reached a certain benchmark level to continue their standard of living, they were considered ready to retire for the purposes of the study.
When will you be able to retire?
The EBRI report looked at the findings of the NRRI against its own as they related to households who were between the ages 50-59 in 2007. The report then compared the percentage of households that will be able to retire at different ages according to each model.
The NRRI came to these conclusions:
- 66 percent of households will be ready to retire by age 66
- 89 percent of household will be ready to retire by age 70
The EBRI came back with different findings, particularly in regard to Americans' readiness to retire at age 70:
- 52 percent of households will be ready to retire by age 65
- 64 percent of households will be ready to retire by age 70
- Households with pre-retirement income in the lowest quartile will have to work until age 84 before 90 percent of these households have a 50 percent probability of success
When the EBRI adjusted its data to eliminate calculations for health-care costs, it said its projections came more in line with the NRRI projections.
"It would be comforting from a public policy standpoint to assume that merely working to age 70 would be a
panacea to the significant challenges of assuring retirement income adequacy," said Jack VanDerhei, EBRI reearch director and author of the study, in a statement. "But this may be a particularly risky
strategy, especially for the vulnerable group of low-income workers."
The EBRI report also says that those who continue working and are enrolled in a defined compensation program at age 65 are more likely to be able to retire earlier.
The competing findings highlighted by the NRRI and the EBRI highlight the difficulty that today's workers face in determining when they should expect to retire. Perhaps the best advice for these workers may be to take these broader predictions with a grain of salt and to focus instead on their individual retirement savings situation.