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Retirement Income Outlook

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While there’s less than sunny news these days when it comes to retirement-income planning, the “crisis” might not be as widespread as reported, says a new report by Andrew G. Biggs of the American Enterprise Institute in Washington, D.C.

Biggs analyzed the income-replacement rates of two groups of workers, one born in 1940 and the other in 1960. He used models of Social Security and pension income developed by the Policy Simulation Group, a private contractor which supplies modeling capacity to the groups like the Social Security Administration. (The models he used are the same as used by the General Accounting Office for its Social Security and pension work).

These models build a representative sample of the population and simulate their education, earnings and life events, such as marriage, divorce, retirement and death. Biggs then compared Social Security and pension income to earnings to calculate a “replacement rate.” The analysis did not consider other sources of retirement income, such as earnings and non-pension financial assets.

The rule-of-thumb that many advisors use is that retirees should aim to replace at least 75 percent of their pre-retirement earnings. Biggs found that the median replacement rate for retirees in the 1940-birth group was 92 percent of pre-retirement earnings, indicating that the typical new retiree is well prepared for retirement. Relatively few individuals in this group have very low replacement rates.

In the future, replacement rates will likely decline somewhat, he believes, as the Social Security retirement age rises and coverage by defined-benefit pensions declines.

Individuals in the 1960-birth cohort, who retire in the 2020s, are projected to have a median replacement rate of around 82 percent. “While lower than for current retirees, this still indicates that the typical retiree will be reasonably well prepared,” says Biggs. “If in the future individuals choose to work slightly longer, either in response to rising life expectancies, the increased Social Security retirement age or other reasons, replacement rates could rise back to current levels.

“These findings indicate that, while both policymakers and the public should take care to ensure adequate retirement savings, we should not rush to the conclusion that there is a ‘crisis’ in retirement preparedness that demands immediate, if hasty, action,” he explains.

Although his research provides grounds for optimism, Biggs still recommends that future retirees work with a financial advisor or online retirement-income calculator to project their own retirement income and replacement rate to see if they are currently on track.

In addition, he says, individuals should also take advantage of employer matches for retirement savings and any tax deferments that are available, such as for IRA or 401(k) plans (or comparable Roth versions).

To see Biggs’s report, “Will You Have Enough to Retire On? The Retirement Security “Crisis,” go to:,pubID.29384/pub_detail.asp