Retirement Income Outlook

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.