‘Short’ Falls: Who’s Most Likely to Come up Short in Retirement, and When?

Source: Jack VanDerhei, Employee Benefit Research Institute (EBRI), EBRI Notes, Vol. 35, No. 6, June 2014

From the abstract:
This paper provides new results showing how many years into retirement Baby Boomer and Gen Xer households are simulated to run short of money, by preretirement income quartile. It begins with a brief introduction of the various methods of quantifying retirement income adequacy, along with a description of EBRI’s Retirement Security Projection Model® (RSPM). This is followed by a series of results from the RSPM focusing on the percentage of Baby-Boomer and Gen-Xer households simulated to run short of money in retirement, as well as an estimate of how soon after retirement this is expected to take place. In that there are different perspectives on the flexibility of individuals in retirement to adjust lifestyle and/or spending, results are presented under three separate thresholds of deterministic expense (80, 90 and 100 percent of average expenses), as well as with and without nursing home and home health-care expenses. Under a variety of simulated post-retirement expense scenarios, the lowest preretirement income quartile is the cohort where the vast majority of the retirement readiness shortfall occurs, and the soonest. When nursing home and home health-care expenses are factored in, the number of households in the lowest-income quartile that is projected to run short of money within 20 years of retirement is considerably larger than those in the other three income quartiles combined. Extending the results to a maximum of 35 years in retirement (age 100, assuming retirement at age 65), 83 percent of the lowest-income quartile households would run short of money and almost half (47 percent) of those in the second-income quartile would face a similar situation. Only 28 percent of those in the third-income quartile and 13 percent of those in the highest income quartile are simulated to run short of money eventually. In presenting these results, EBRI does not favor or oppose any specific modification to the current retirement system. Rather, EBRI’s mission remains to provide objective analysis that can inform decision making by others. As the various design and program modification alternatives are debated (both reforms and status quo), it is instructive to keep in mind who’s most likely to come up short in retirement, when, and why.