Weather forecasts? What about retirement forecasts?

The NIRS projections were largely derived by looking at self-reported retirement account balances, financial assets and net worth from the Federal Reserve’s 2010 Survey of Consumer Finances, incorporating some assumptions about defined benefit assets, and extrapolating target retirement savings needs based on a set of age-based income multipliers — income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement.  

For public policy purposes, EBRI has long defined adequate retirement income as having the financial resources to cover basic expenses plus uninsured medical costs in retirement. Working from that definition as a starting point, along with an assumption that retirement represents the cessation of paid employment and begins at age 65, we have projected that approximately 44 percent of Baby Boomer and Gen-X households are simulated to be at risk of running short of money in retirement, assuming they retain any net housing equity until other financial resources are depleted. Our most recent assessment of that total aggregate gap between needs and available resources is $4.6 trillion, with an individual average of approximately $48,000. 

That is, of course, a large gap, though one considerably smaller than that highlighted in the headline. While it represents a lot of households — it also includes a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars. For those seeking to understand, and perhaps craft solutions for, the current projected shortfalls, this is an important distinction, and one given short shrift by that headline’s focus. 

A lot of science goes into making weather projections, and yet a temperature difference of a mere degree or two can be the difference between a modest rainfall or a blizzard of epic proportion. Beyond those reality variables, imprecise modeling assumptions can distort forecasts, producing their own disruptions.

When it comes to effective retirement policy, it is, of course, important to be able to quantify just how big the nation’s retirement savings shortfall is. It is, however, perhaps even more important to remember what most retirement plan advisors know — that whether an individual shortfall exists will be a combination of individual circumstances, as well as varying degrees of preparation, access, needs — and advice.