The report – written by Alicia H. Munnell, Wenliang Hou and Geoffrey T. Sanzenbacher – examines whether households have a good sense of their own retirement preparedness.
“[D]o their retirement expectations match the reality they face? Do people at risk know they are at risk?” the report asks.
About a quarter of households are overly worried about their retirement finances, the study found, while about a fifth aren’t as worried ad they should be.
First the report looks at the National Retirement Risk Index (NRRI), which measures the percentage of working-age households who are at risk of being financially unprepared for retirement. The NRRI is based on the Federal Reserve’s Survey of Consumer Finances (SCF), a triennial survey of a nationally representative sample of U.S. households.
The NRRI calculations show that “even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes,” 52% will be at risk of being unable to maintain their standard of living in retirement.
A comparison with earlier years shows that the situation has become more serious over time. In 1989, 30% of households were at risk of being unable to maintain their standard of living in retirement, which rose to 40% by 1998 and 45% by 2004 before spiking at 53% in 2010.
(The NRRI determines whether a household is “at risk” by calculating a replacement rate — projected retirement income as a percentage of pre-retirement earnings — and compares that replacement rate with a target replacement rate derived from a life-cycle consumption smoothing model. Those who fail to come within 10% of the target are defined as “at risk.”)
To determine if this is an accurate picture of the situation, the report then compares the NRRI to households’ own perceptions of their retirement preparedness.
The Federal Reserve’s Survey of Consumer Finances includes a self-assessment where it asks each household to rate the adequacy of its anticipated combined retirement income from traditional sources: Social Security and employer pensions.
The report finds that in both 2004 (before the financial crisis) and 2013 (the most recent year of data), households’ self-assessment of retirement preparedness is relatively consistent with the NRRI calculations.
“This finding lends support to the notion that the NRRI is accurately detecting a widespread problem,” the report states.
But are these households assessing themselves accurately?
While aggregate perceptions match the NRRI, it does not mean that individual households have a correct assessment. So the report set out to determine the share of households with and without accurate perceptions.