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"Are You Prepared for Retirement?" by Julie Jason

Financial Planning Retirement Plans

Originally published: July 7, 2023 (distributed by Andrews McMeel Syndication)

The difference between what you know and what you don't -- how big is that divide when it comes to financing retirement?

Do you have a good understanding of where you are when it comes to retirement preparedness? Thirty-eight percent of households are in good shape, according to a recent Center for Retirement Research at Boston College (CRR) brief titled "How Well Do People Perceive Their Retirement Preparedness?" (tinyurl.com/4xj4z5j5). Another 19% of households are in trouble, and they know it. 

Then there are the 43% of households that fall into one of two categories -- "not worried enough" or "too worried." Either can be a concern, but "not worried enough" is likely the bigger one.

The CRR brief's results are based on calculations involving the National Retirement Risk Index (NRRI), which the CRR uses to measure "the share of working-age households that is 'at-risk' of being unable to maintain their pre-retirement standard of living in retirement" (tinyurl.com/4xb5yumn), and the Federal Reserve's 2019 Survey of Consumer Finances (tinyurl.com/har77pms). 

The Fed survey asked households to self-assess their financial preparedness for retirement, and roughly a third self-reported being at risk. In contrast, the NRRI projected that nearly 50% were at risk of not having enough for retirement. 

When the NRRI results were compared with the individual household assessments, it was determined that 28% of households thought they were not at risk, while the NRRI predicted that they were (this group was tagged "not worried enough"), and 15% thought they would fall short of retirement goals, while the NRRI projected they will have enough (the group was "too worried"). When broken down by income, high-income households were most likely to be "not worried enough," while low-income households were more likely to be "too worried."

What is behind the incorrect perceptions of retirement preparedness? The CRR brief offered some possible explanations.

Of the two groups, I'll focus on "not worried enough." For them, the trouble spots included:

-- Housing debt-to-asset ratio. According to the CRR brief, "As the housing market improved, households may have been comforted by the rising value of their asset, without considering how much they still owed." This factor was especially strong for high-income households, as they generally owned more expensive homes.

-- A defined contribution retirement plan (like a 401(k) account) that was below the median. The CRR brief calls this a "wealth illusion," using the example that "$100,000 looks like a lot of money to many people even though it provides only about $617 per month in retirement income." According to the CRR, this issue is a higher probability for low- and middle-income households.

-- Two earners but one saver. "Many dual-earner households may not realize they will have to replace both spouses' earnings to maintain their standard of living in retirement," according to the CRR brief. "So, not surprisingly, dual-earner households where only one spouse has a retirement plan are more likely to be 'not worried enough.'" Another point: The problem increases with income level because Social Security "replaces a smaller share of pre-retirement income for high earners."

The key danger for this group? Their lack of worry means that they won't take action, and their overconfidence could lead them to underestimate possible risks.

All this points toward making sure you understand what you have saved for retirement. Do an audit of where you stand now. 

Your 401(k) reports should include an estimate of what you can expect to receive in monthly income if your account balance is used to buy an annuity. 

The Social Security Administration website (ssa.gov) can provide an estimate of what you will be receiving once you begin taking Social Security benefits. 

If you have an IRA, you can use a calculator like the savings distribution tool at 360 Degrees of Financial Literacy (tinyurl.com/mr373fvy) to get an estimate of how long your account will remain liquid based on withdrawals.

I would rather be in the "too worried" group and continuing (and possibly increasing) my efforts to save for retirement than be in the "not worried enough" group and find myself caught short financially once retirement has arrived.