The number of years of defined contribution plan eligibility has a significant impact on Gen X workers’ risk of running out of income in retirement, a report from the Employee Benefits Research Institute found.
EBRI simulated outcomes in its Retirement Security Projection Model to determine how many investors were at risk of running out of retirement income, as well as how severe their shortfall could be. The model considers three different levels of “adequate income,” or the accumulated value of deficits generated after all members of the household have died, divided by the accumulated value of the total retirement expenditures for the household.
Almost 44% of Gen X households are at risk of running out of income in retirement, the report, released in June, found.
That figure is based on the assumption that individuals retire at age 65 and that they’ll fail to accumulate 100% of adequate income. A little over one-third of households are at risk of having less than 90% of the resources they need, and 19% are at risk of having less than 80%.
When taking Gen X households’ future earning and saving years into consideration, the report found more than 60% of households without future 401(k) eligibility were at risk of running out of retirement income. For those with another 20 years of eligibility, just 18% were at risk.
The report found 10% of Gen X families will have a shortfall of between $50,000 and $100,000, with 9.8% having a shortfall of less than $50,000. Single Gen Xers were not so lucky. More than 11% of single men and 20.6% of single women will have a shortfall of between $101,000 and $200,000. Fully 13% of single women could have a shortfall of more than $200,000.
These shortfalls can be dramatically reduced by participating in a defined contribution plan, the report noted. For individuals with no future years in a 401(k) plan, their retirement deficit was estimated to be $78,000. For those with between one and nine years left in a plan, the deficit fell to $55,000. Those with at least 20 years left in a plan could reduce their deficit to $23,000.
EBRI also considered the impact health care and nursing home costs could have on retirement. For example, 90% of single Gen X men were simulated to have no shortfall in retirement if health care and nursing home costs were ignored. By including those costs in the model, the percentage of single men with no shortfalls fell to 68%. EBRI found similar results among single women and married Gen Xers. “Ignoring the impact of nursing home and home health care costs in retirement significantly exaggerates the likelihood of achieving retirement income adequacy,” the report noted.
The percentage of households with adequate retirement income has increased by between five and eight percentage points since 2003, EBRI found. Still, despite the small improvement, there are a “significant percentage of households that are simulated to be at risk of not being able to cover retirement expenses and uninsured medical costs” throughout their retirements.