“Last” Chances

While many Americans seem to lack a definitive sense of what living in retirement will be like, how long it will last, or how much it will cost, their sense of when it will begin has been trending older. The 2012 Retirement Confidence Survey (RCS) noted that, whereas in 1991, just 11 percent of workers expected to retire after age 65, in 2012, more than three times as many (37 percent) report they expect to wait until after age 65 to retire—and most of those indicated an expected retirement age of 70 or older.¹

Those expecting to delay retirement perhaps found solace in a recent report by the Center for Retirement Research (CRR) at Boston College which concluded that by postponing retirement until age 70, the vast majority of households (86 percent) were “…projected to be prepared for retirement.”

That sounds good – but what about the assumptions underlying that conclusion?

In 2003, the Employee Benefit Research Institute (EBRI) constructed the EBRI-ERF Retirement Security Projection Model® (RSPM)—the first nationally representative, micro-simulation model based on actual 401(k) participant behavior and a stochastic decumulation model. And though we have explicitly recognized that many individuals were retiring at earlier ages, a retirement age of 65 was chosen for baseline results, based upon the assumption that most workers would have the flexibility to work until that age, if they so chose.

Last year we modified the RSPM to determine whether just “working a few more years after age 65” would indeed be a feasible financial solution for those determined to be “at risk.” Unfortunately, for those counting on that as a retirement savings “solution”, the answer is not always “yes.”

Indeed, results from the EBRI modeling indicated that the lowest pre-retirement income quartile would need to defer retirement to age 84 before 90 percent of the households would have even a break-even (50‒50) chance of success.

Working longer does help, of course. A recent EBRI Notes article titled “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?²” finds that 23 percent of those who would have been at risk of running out money in retirement if they retired at age 65 would be “ready to retire” if they kept working to 70. Better still, if those individuals are assumed not only to delay retirement, but also to keep participating in a defined contribution plan, a full third of those who would have been at risk of running short of money if they retired at age 65 would be “ready” to retire at age 70.³

What accounts for the difference in the projections? For a household to be classified as “ready for retirement” under the CRR method, a projected replacement rate is simply compared with a benchmark rate, while the RSPM uses a fully developed stochastic decumulation process to determine whether a family will run short of money in retirement (and, if so, at what age) under each of a thousand alternative, simulated retirement paths. Unlike the CRR model, EBRI’s RSPM model simultaneously considers the impact of longevity risk, investment risk, and the risk of potentially catastrophic health care costs (such as prolonged stays in a nursing home).⁵

Which, as it so happens, are the same things that those trying to make sure they have enough money to last through retirement—and those trying to help them do so—need to consider.

Nevin E. Adams, JD

¹ see “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?”

² Also from the above article, “It’s worth nothing that a significant portion of the improvement in readiness takes place in the first four years after age 65, but that tends to level off in the early 70s before picking up in the late 70s and early 80s. Higher-income households would be in a much better situation: 90 percent of the highest-income quartile would already have a 50 percent probability of success by age 65, while those in the next-highest income quartile would need to wait until age 72 for 90 percent of their group to have a 50 percent probability. Those in the second-lowest income quartile would need to wait until age 81 before 90 percent of their group had a 50 percent probability of success.

³ At the same time, the percentage of workers expecting to retire before age 65 has decreased from 50 percent in 1991 to 24 percent (see this EBRI analysis, online here). A sizable proportion of retirees report each year that they retired sooner than they had planned (50 percent in 2012). Those who retire early often do so for negative reasons, such as a health problem or disability (51 percent) or company downsizing or closure (21 percent). The 2011 RCS found that the poor economy (36 percent), lack of faith in Social Security or the government (16 percent) and a change in employment situation (15 percent) were the most frequently cited reasons for postponing retirement.

⁴. For more on how this modeling works, see “Single Best Answer.”

⁵ For an explanation of four things that are sometimes overlooked by retirement-needs projection models, see “Generation ‘Gaps,’” online here.

APP Solution

A couple of weeks back, I was on one of Virginia’s Civil War battlefields, looking to join one of the local park ranger tours. This particular one was scheduled to start deep within the park itself, and while I left home certain that I knew where I was heading, when I got there, I quickly discovered otherwise.

Fortunately, or so I thought at the time, there were about a half dozen other individuals also looking to find the same tour. We quickly convened around a shared map, looked for landmarks, and—based on the collective sense of the group—headed off in what seemed to be the right direction.

Five minutes later I began to suspect we were not heading in the right direction, and 15minutes later I was sure of it. Then I remembered that I had recently downloaded a smartphone “app” for this particular battlefield—one that not only contained a map, but also a GPS feature that allowed me to not only find where I was but to visualize where I needed to be. With that, we could begin heading in the right direction.

Smartphones are an increasingly important part of our lives, in no small part because of the “apps” (short for applications) that they bring to us. These days, apps make it possible to order a pizza, identify that song playing on the radio (and order and/or download your own copy), scan price codes and comparison shop without leaving the store.

While many of today’s “apps” offer much in the way of entertainment and informational value, a great many of them also make it easy to spend , rather than save, money. In fact, the 2012 Retirement Confidence Survey by the Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., found that the use of technology, such as smart phones and tablet computers to help manage finances was still relatively rare.¹

But now there’s a new app designed to make it easier to know where you are in your retirement savings: the EBRI Ballpark E$timate,® developed by Matrix Group International, Inc., and the research team at EBRI, and provided by Choose to Save.®

As a web-based tool, and as a hardcopy reference, the EBRI Ballpark E$timate® (as well as other tools and information available at www.choosetosave.org²) has long helped millions of Americans do a better job of planning for their financial future.

Now the EBRI Ballpark E$timate® “app” (like that smartphone GPS) can help Americans do a better job of knowing where they are—so they can make sure they are headed in the right direction, too.

The EBRI Ballpark E$timate® is currently available as a free download from the iPhone store. More information is online here.

Nevin E. Adams, JD

¹ “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” is online here.

² In addition to the Ballpark E$timate,® you will find a wide variety of free tools and innovative resources, including free videos that can be used to share key savings messages with participants available at www.choosetosave.org

“Storm” Warnings

Amidst the recent coverage of Hurricane Isaac, I was reminded that it was only a year ago that Hurricane Irene came barreling up the East Coast. We had just deposited my youngest off for his first semester of college, and then spent the drive home up the East Coast with Irene (and the reports of her potential destruction and probable landfalls) close behind. We arrived home, unloaded in record time, and went straight to the local hardware store to stock up for the coming storm.

We weren’t the only ones to do so, of course. And what we had most hoped to acquire (a generator) was not to be found—there, or at that moment, apparently anywhere in the state.

What made that situation all the more infuriating was that, while the prospect of a hurricane landfall was relatively unique, we had, on several prior occasions, been without power, and for extended periods. After each I had told myself that we really needed to invest in a generator—but, as human beings are inclined to do, thinking that I had time to do so when it was more convenient, I simply (and repeatedly) postponed taking action.

Life is full of uncertainty, and events and circumstances, as often as not, happen with little, if any warning. However, hurricanes you can see coming a long way off. There’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, as with Hurricane Katrina, the real impact is what happens afterward. In theory, at least, that provides time to prepare—but, as I was reminded a year ago, sometimes you don’t have time enough.

I suppose a lot of retirement plan participants are going to look back at their working lives that way as they near the threshold of retirement. They’ll likely remember the admonitions about saving sooner, saving more, and the importance of regular, prudent reallocations of investment portfolios.

The Retirement Confidence Survey (RCS) has, for years now, chronicled not only the current state of retirement unpreparedness of many, but their awareness of the need to be more attentive to those preparations. Sure, you can find yourself forced suddenly into an unplanned retirement—in fact, retiree respondents to the RCS have long indicated that they stopped working sooner than they had planned.¹ But most of us have plenty of time, both to see that day coming, and to do something about it.

Ultimately, of course, what matters isn’t the time you have, it’s what you do² with it.

Nevin E. Adams, JD

¹ Twenty-five percent of workers in the 2012 Retirement Confidence Survey say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that more than tripled, to 37 percent. Those expectations notwithstanding, half of current retirees surveyed say they left the work force unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure (see “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” online here).

² A great place to start those preparations is to figure out what you’ll need, as millions of Americans have with the BallparkE$timate,® developed by the research team at the Employee Benefit Research Institute, and available online here.

Additionally, a wide variety of free tools and innovative resources, including free videos that can be used to share key savings messages with participants, is available here.

Different Mindsets

Last week Beloit College released the Beloit College Mindset List, as it has each August since 1998. Originally created as a reminder to faculty to be aware of dated references, the list provides a “look at the cultural touchstones that shape the lives of students entering college.”

For example, this year’s freshman class, born in 1994, have never known a time when history didn’t have its own channel, when there were tan M&Ms (or when there weren’t blue ones), or when “It’s A Wonderful Life” was shown more than twice during the holidays. They grew up talking about “who shot Mr. Burns?” not “Who Shot J.R.?” and while for them there’s always been an NFL franchise in Jacksonville, they’ve never known one in Los Angeles. That floppy disk icon for “save” in the word processing document is as anachronistic to them as the “CC” reference to “carbon copy” likely was to their parents’ email. And, perhaps most significantly, they have never lived in a world without the World Wide Web.¹

Despite those differences, the class of 2016 will one day soon be faced with the same challenges of preparing for retirement as the rest of us. They’ll have to work through how much to save, how to invest those savings, what role Social Security will play, and—eventually—how and how fast to draw down those savings.

Those fortunate enough to have access to a work place retirement savings plan at least stand to have some advantages their parents didn’t. They’ll have a better shot at joining those programs immediately, rather than waiting a year, as was once the norm. There’s a growing chance that they will be enrolled in those plans automatically,¹and with the option to increase that initial contribution automatically as well. The expanding availability of qualified default investment alternatives, like target-date funds, should make their investment choices easier and better diversified, and some will likely benefit from the counsel of a growing number of expert advisors. As for help in figuring out how best to draw down those savings in retirement, more choices and alternatives come to market every year.

However, they also have another big advantage (and one that helps make all those other advantages all the better): They’ll have the advantage of time, a full career to save and build, to save at better rates, to invest more efficiently and effectively.

It’s more than just a shift in mindset—and it could give retirement saving a whole new perspective.

- Nevin E. Adams, JD

¹ The full 2016 Mindset List (and links to prior years’ lists) is online here.

² EBRI has recently quantified the impact of eligibility for participation in a 401(k) plan on retirement readiness for Gen Xers. See this report online here. See also “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,” online here.

Withdrawal “Symptoms”

I was recently asked about the so-called 4 percent “rule.” That’s the rule of thumb(1) that many financial consultants rely on as a formula for how much money can be withdrawn from retirement savings every year (generally adjusted for inflation) without running out of money. Of course, like so many of the “assumptions” about retirement, certainly in the aftermath of the 2008 financial crisis, that withdrawal rule of thumb has drawn additional scrutiny.(2)

At the time, my comment was that the 4 percent guideline is just that—a guideline. What’s not as clear is whether adhering to that guideline produces an income stream in retirement that will be enough to live on.

How much are people actually withdrawing from their retirement accounts? At a recent EBRI policy forum,(3) Craig Copeland, senior research associate at the Employee Benefit Research Institute, explained that the median IRA individual withdrawal rates amounted to 5.5 percent of the account balance in 2010, though he noted that those 71 or older (when required minimum distributions kick in) were much more likely to be withdrawing at a rate of 3–5 percent (in 2008, that group’s median withdrawal rate was 7.2 percent, but in 2010, it was 5.2 percent), based on the activity among the 14.85 million accounts and $1 trillion in assets contained in the EBRI IRA Database.(4) Will these drawdown rates create a problem down the road? Will these individual run short of funds in retirement?

At its core, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4 percent “rule” is really just a mathematical exercise.

However, trying to live on the resources you actually have available in retirement is reality—and those post-retirement withdrawal decisions are generally easier to make when you’ve made good decisions pre-retirement.

- Nevin E. Adams, JD

(1) Certified financial planner William P. Bengen is frequently credited with the concept, based on his article “Determining Withdrawal Rates Using Historical Data,” published in the October 1994 issue of the Journal of Financial Planning.

(2) It had drawn criticism before the 2008 financial crisis as well: See “The 4% Rule—At What Price?”

(3) The agenda, presentation materials, and a recording of EBRI’s May policy forum are available online here. Dr. Copeland’s presentation is online here.

(4) The results come from 2010 data in the EBRI IRA Database,TM which had 14.85 million accounts, held by 11.1 million individuals, with $1 trillion in assets—roughly one-fifth of both owners and assets in the IRA universe.

Everybody Into the Pool?

As a teenager, I remember the occasional visits to the local swimming pool. I also remember that about once an hour, the lifeguards on duty would periodically clear the pool, ostensibly to clean out debris, to enforce a certain rest break on the swimmers (and doubtless for the lifeguards), and perhaps to assure that all the swimmers were still able to get out of the pool. Then, after what seemed to my teenage senses like an eternity, the lifeguards would blow a whistle—the “all-clear” signal for everyone to jump back in the pool. They were very strict about this—and kids were routinely banned for an hour, or even the rest of the day for jumping in “early.” As a result, even after the whistle, most of us would hesitate and look around to make sure that we weren’t the only ones going in.

With the Supreme Court’s recent decision on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) behind us, industry surveys suggest that employers are turning to the issue of the next phase of implementation. Moreover, the combination of insurance market reforms and the embodiment of the exchange structure in the PPACA have brought a renewed focus on limiting employer’s health care cost exposure, much as changes in funding requirements and accounting treatment led many to reconsider their approach to retirement benefits.

A recent EBRI Issue Brief¹ notes that it was only about a decade ago that defined contribution (DC) health plans, arrangements that shift choice of health insurance from employers to employees, were the focus of much attention. As far back as the late 1990s, more than 62 percent of health care leaders predicted that employers would move to DC health plans by 2010.

That trend never fully emerged, of course—employers were hesitant to drop group coverage in favor of offering individual policies, some were likely concerned that many employees would not be able to secure coverage in the individual market, some others drawn to the tax advantages. Many viewed the benefit as an important tool in attracting and retaining a strong work force, and surveys, including EBRI’s Health Confidence Survey (HCS), suggest that workers do, in fact, appreciate the offerings.

EBRI’s Paul Fronstin notes that the combination of insurance market reforms and the embodiment of the exchange structure² in PPACA have brought a renewed focus on limiting the employer’s health care cost exposure by providing a fixed-dollar contribution that workers could use to purchase individual policies. He notes that the vehicle that some are interested in using for providing coverage is a private health insurance exchange, through which employers might be better able to accelerate the drive toward a more mass consumer-driven insurance market—and in the process gain more control over their health care contribution costs, while shifting to employees the authority to control the terms (and to some extent, the costs) of their own health insurance.

This should sound familiar to those who have watched similar motivations lead to the shift in retirement plan emphasis from pension plans to defined contribution/401(k) retirement benefits. The question is, will the combination of factors provide employers with the “all clear” sign to undertake changes they have, thus far, been hesitant to take?

And if that all clear sign is given, will employers all jump in at once?

- Nevin E. Adams, JD

¹ In addition to a historical perspective, the July 2012 Issue Brief examines the issues related to private health insurance exchanges, the possible structure of an exchange and how it can be funded, as well as the pros, cons, and uncertainties to employers of adopting a private exchange. MORE.

² Fronstin notes that private exchanges are already in development partly because of the uncertainty related to the status of state-based exchanges. Development of several of these were postponed, pending resolution of the PPACA’s constitutional challenge. Several Republican governors have said they will refuse to establish state-based exchanges, leaving them to the federal government to run. As recently as March 2012, the majority of states had still not taken the necessary steps to establish an exchange.

Sums of Substance

An acquaintance of mine recently described to me the challenges of trying to help a family member rebalance their retirement portfolio, which at the moment was split between a 401(k), 403(b), and an IRA.

Curious, I asked him how the funds in the IRA were invested. He laughed and said, “Which one?”

The data suggest that my friend’s family member isn’t alone in that regard; the average IRA balance is about a third higher and the median (mid-point) balance almost 42 percent larger when multiple individual retirement accounts (IRAs) owned by an individual are taken into account, according to a recent Employee Benefit Research Institute (EBRI) analysis based on its unique EBRI IRA Database.™¹

In fact, according to a recent EBRI report², in 2010 the average IRA individual balance (all accounts from the same person combined) was $91,864, while the median balance was $25,296. By comparison, the average and median account balance of all IRAs was $67,438 and $17,863, respectively. Compared with 2008, the average and median individual balances are up 32 and 26 percent, respectively.

Individual retirement accounts (IRAs) are a vital component of U.S. retirement savings, holding more than 25 percent of all retirement assets in the nation. Moreover, a substantial portion of these IRA assets originated in other tax-qualified retirement plans, such as defined benefit plans (pensions) and 401(k) plans, and were moved to IRAs through rollovers from those plans.

Keeping up with, and managing, retirement savings accounts remains both a challenge and an opportunity for individuals, all the more so when those savings are held in multiple accounts and locations. Similarly, an understanding and appreciation of the complete picture offers the best perspective for crafting effective retirement savings policies.

Sometimes you can’t see the forest for the trees – but, as the data suggest, it’s important to remember that the “forest” is the sum of all the trees.

- Nevin E. Adams, JD

¹The EBRI IRA Database™ is an ongoing project that collects data from IRA plan administrators. For year-end 2010, it contains information on 14.85 million accounts for 11.1 million unique individuals with total assets of $1.002 trillion. A unique aspect of the EBRI IRA Database™ is the ability to link the balances of individuals with more than one account in the database, providing a more complete picture of their IRA-based retirement savings. For more information, see Individual Retirement Account Balances, Contributions, and Rollovers, 2010: The EBRI IRA Database ^TM here.

²Individual Retirement Account Balances, Contributions, and Rollovers, 2010: The EBRI IRA Database ^TM

Reality “Checks”

A recent opinion piece by Teresa Ghilarducci in the New York Times took on what she termed a “ridiculous approach to retirement,” drawn from what appears to be a series of “ad hoc” dinner conversations with friends about their “retirement plans and prospects.”

Most of the op-ed focused on the perceived shortfalls of the voluntary retirement savings system: People don’t have enough savings, don’t know how much “enough” is, make inaccurate assumptions about the length of their lives and their ability to extend their working careers, and aren’t able to find qualified help to help them make more appropriate savings decisions. In place of the current system, which Ghilarducci maintains “will always fall short,” she proposes “a way out” via mandatory savings in addition to the current Social Security withholding. Consider that, just three sentences into the op-ed, she posits the jaw-dropping statistic that 75 percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts.

“You don’t like mandates? Get real,” she declares.

When we looked across the EBRI database of some 2.3 million active¹ 401(k) participants at the end of 2010 who were between the ages of 56 and 65, inclusive – people who have chosen to supplement Social Security through voluntary savings – we found only about half that number (37 percent) with less than $30,000 in those accounts. Moreover, when looking at those in that group who have more than 30 years of tenure, fewer than 13% are in that circumstance – and neither set of numbers includes retirement assets that those individuals may have accumulated in the plans of their previous employers, or that they may have rolled into Individual Retirement Accounts (IRAs), as well as pensions or other savings (see Average IRA Balances a Third Higher When Multiple Accounts are Considered).

That’s not to say that the financial challenges outlined in the op-ed won’t be a reality for some. In fact, EBRI’s Retirement Security Projection Model® (RSPM) developed in 2003, updated in 2010², finds that for Early Baby Boomers (individuals born between 1948 and 1954), Late Baby Boomers (born between 1955 and 1964) and Generation Xers (born between 1965 and 1974), roughly 44 percent of the simulated lifepaths were projected to lack adequate retirement income for basic retirement expenses plus uninsured health care costs (see “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model”) .

The op-ed declares that a voluntary Social Security system “would have been a disaster.” Indeed, an objective observer might conclude that that is why Congress originally established Social Security as a mandatory system, to provide a base of income for retirees as it still does today. With the underpinnings of that mandatory foundation of Social Security, the current voluntary system was established to allow employers and individuals to supplement that base. In recent decades Social Security’s benefits have been “reduced” by increases in the definition of normal retirement age, and a partial taxation of benefits, despite increases in the mandatory withholding rates, in order to adjust to the realities of rising costs from changing demographics. Even before the recent two-year partial withholding “holiday,” Congress was, and is still today, discussing additional adjustments to that mandatory system.

The voluntary system should be judged as just that, a voluntary system. As noted above, the data makes it clear that voluntary employer-based plans are, in fact, leading to a great deal of real savings accumulated to supplement Social Security. Many in the nation work every day to encourage those savings to be increased (see www.choosetosave.org ).

The “real” questions, certainly as one reflects on the debate over the Affordable Care Act mandate, amidst today’s political and economic turmoil, are whether the Congress and the nation will be willing – and able – to pay the price of an expanded or new retirement savings mandate, and, regardless of that outcome, how can a voluntary system be moved to higher levels of success?

Nevin E. Adams, JD

¹ Active in this case is defined as anyone in the database with a positive account balance and a positive total contribution (employee plus employer) for 2010.

² The RSPM was updated for a variety of significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans, and the recent crises in the financial and housing markets. EBRI has recently updated RSPM to account for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010. For more information on the RSPM, check out the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model.”

Last June EBRI CEO Dallas Salisbury participated in an “Ideas in Action with Jim Glassman” program discussion with Ghilarducci and Alex Brill from the American Enterprise Institute titled “America’s Retirement Challenge: Should We Ditch 401(k) Plans?” You can view it online here.

“Premature” Conclusions

A couple of months back, my wife noticed a water spot on the ceiling of our dining room. Now, it didn’t look fresh, but considering that that ceiling was directly underneath the master bath, she had the good sense to call a plumber. Sure enough, there was a leaky gasket—and from the look of it, one that had been there for some time before we took ownership. Fortunately, the leak was small, and the damage was minimal. Even more fortunately, we took the time to have the plumber check out the other bathrooms, and found the makings of similar, future problems well before the “leakage” became serious.

Homes aren’t the only place with the potential for problems with leakage. A recent report on 401(k) loan defaults suggests that “leakage”—the money being drawn out of retirement plans prior to retirement —is a lot larger than a number of industry and government reports have indicated. In fact, the report (online here) claims that “the leakage could be as high as $37 billion per year,” although it completes that sentence by acknowledging that the estimate depends “…on the source of the data on loans outstanding and the assumed default rate.”

The paper promotes a recommendation that ERISA be amended so that plans could choose to allow those who take out 401(k) loans to be defaulted into insurance that would repay those loans on default. It looks at a number of different sources to conclude that the available data do not really capture all the loan leakage (because some of it is obscured as part of distribution upon termination/separation from service), and that the available data do not (yet) capture the impact of the prolonged economic slowdown that is evidenced in other, non-401(k) loan trends.

Setting aside the validity of those conclusions, and the scale of their impact on the analysis, the issue of “leakage” remains a focus for many in our industry.

Late last year, an EBRI Issue Brief examined the status of 401(k) loans, noting that in the 2010 EBRI/ICI 401(k) database, 87 percent of participants in that database¹ were in plans offering loans, although as “has been the case for the 15 years that the database has tracked 401(k) plan participants, relatively few participants made use of this borrowing privilege.”
Indeed, from 1996 through 2008, on average, less than one-fifth of 401(k) participants with access to loans had loans outstanding. At year-end 2009, the percentage of participants who were offered loans with loans outstanding ticked up to 21 percent, but it remained at that level at year-end 2010 (see the full report, online here). This hard data, by the way, measuring activity by more than 23 million 401(k) participants.

If loan levels and amounts outstanding have remained relatively constant during this period (which included the “Great Recession”), one might nonetheless wonder about the overall impact on retirement readiness.

If you define “success” as achieving an 80 percent real replacement rate from Social Security and 401(k) accumulations combined, looking at workers ages 25–29 (who will have more than 30 years of simulated eligibility for participation in a 401(k) plan), then the decrease in success resulting from the COMBINATION of cashouts, hardship withdrawals, and loans is just 6.1 percent.² The impact when you add in the impact of loan defaults is less than 1 percentage point higher (approximately 7.1 percent for all four factors combined).

Looking at the overall impact another way, more than three-fifths of those in the lowest-income quartile³ with more than 30 years of remaining 401(k) eligibility will still be able to retire at age 65 with savings and Social Security equal to 80 percent of their real pre-retirement income levels, even when factoring in actual rates of cashout, hardship withdrawals, and loans—INCLUDING the impact of loan defaults.

The impact at an individual level can, of course, be more severe—something that will be explored by future EBRI research.

A Problem to Fix?

There is, however, a potentially larger philosophical issue: whether the utilization of these funds prior to retirement constitutes a “leakage” crisis that cries out for a remedy. We don’t know how many participants and their families have been spared true financial hardship in the “here-and-now” by virtue of access to funds they set aside in these programs. Nor do we know that individuals chose to defer the receipt of current compensation specifically for retirement, rather than for interim (but important) savings goals—such as home ownership or college tuition—that make their own contributions to retirement security. It’s hard to know how many of these participants would have committed to saving at all, or to saving at the amounts they chose, if they (particularly the young with decades of work ahead of them) had to balance that against a realization that those monies would be unavailable until retirement.

In fixing the recent leakage problem in our home, the plumber replaced the worn gaskets, but at the same time sought to improve on things by tightening (as it turns out, over-tightening) some of the connections further up the line. That extra step produced an unanticipated outcome that didn’t show up until the next day, in dramatic fashion. Like my plumbing problem, retirement plan “leakage,” unminded, has the potential to cause damage—to deplete and undermine retirement savings. However, a view that all pre-retirement distributions from these programs are a problem that requires redress not only ignores the law and regulations as written, it also has the potential to create unanticipated changes in savings behaviors.

And the data—based on hard data from actual participant balances and activity—indicate that such concerns are at least somewhat premature.

- Nevin E. Adams, JD

Notes

¹ The EBRI/ICI Participant-Directed Retirement Plan Data Collection Project is the largest, most representative repository of information about individual 401(k) plan participant accounts in the world. As of December 31, 2010, the EBRI/ICI database included statistical information about 23.4 million 401(k) plan participants, in 64,455 employer-sponsored 401(k) plans, representing $1.414 trillion in assets. The 2010 EBRI/ICI database covered 46 percent of the universe of 401(k) plan participants.

² Workers are assumed to retire at age 65 and all 401(k) balances are converted into a real annuity at an annuity purchase price of 18.62. Additionally, the projections assume no break in contributions occurs with a change in employers, that the maximum employee contribution is 6 percent of compensation.

³ Those in the higher income quartile have more trouble reaching the success threshold, given the PIA formula in Social Security. Cashouts, loans and hardship withdrawals have approximately the same impact as for those in the lowest income quartile.

Facts and “Figures”

A recent paper from the Center for Retirement Research at Boston College was titled “401(k) Plans in 2010: An Update from the SCF.” The SCF¹ (perhaps better known to non-researchers as the Survey of Consumer Finances) is, as its name suggests, a survey of consumer households “to provide detailed information on the finances of U.S. families.” It’s conducted every three years by the Federal Reserve, and is eagerly awaited and widely used—from analysis at the Federal Reserve and other branches of government to scholarly work at the major economic research centers. The 2010 version was published in June.

As valuable as the SCF information is, it’s important to remember that it contains self-reported information from approximately 6,500 households in 2010, which is to say the results are what individuals told the surveying organizations on a range of household finance issues (typically over a 90 minute period); of those households, only about 2,100 had defined contribution retirement accounts. Also, the SCF does not necessarily include the same households from one survey period to the next.

The CRR analysis incorporated some of the SCF data (ownership of a retirement plan account, participation, median 401(k)/IRA account balances, asset allocations within those accounts, and distribution/loan patterns). The report then brings in data from other sources on features such as automatic enrollment, hardship withdrawals, and IRAs to complete its assessment, summarized on its website as “Progress in the 401(k) system stalled in the wake of the economic crisis.”

The summary went on to note that “despite an increase in auto-enrollment, the percent of employees not participating ticked up,” “401(k) contributions slipped, while leakages through cash outs, loans, and hardship withdrawals increased”—and that, “…the typical household approaching retirement had only $120,000 in 401(k)/IRA holdings in 2010, about the same as in 2007.” Setting aside for a moment the question of what “typical” is, a logical research question arises: Are these statements a researcher’s extrapolation, or based upon hard data, and thus “facts”?

What We Know

EBRI research has previously noted that, while the financial crisis of 2008 had a significant impact on retirement savings balances, as recently as just a month ago, more than 94 percent of the consistent participants in the EBRI/ICI 401(k) database² are estimated to have balances higher than they did at the pre-recession market peak of October 9, 2007 (see “Returns Engagement”). According to a number of industry surveys, participation rates have remained relatively consistent, despite the soft economy and tumultuous market environment, and EBRI research finds comparable trends in loan activity (see “401(k) Plan Asset Allocation, Account Balances, and Loan Activity In 2010”). Also, at year-end 2010, the data show that 401(k) loan balances outstanding declined slightly from those in the past few years.

What else do we know?

We know that the number of future years that workers are eligible to participate in a defined contribution plan makes a tremendous difference in their at-risk ratings (See “Opportunity Costs”).

We know that automatic enrollment, where deployed, has a significant positive impact on retirement readiness (see “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors”; “EBRI: Auto-Enrollment Trend Boosts Retirement Readiness Ratings”).

We know that “averages” are easy to understand, and relatively easy to calculate—but they don’t always provide an accurate³ portrayal of the real world (see “Above Average”).

We also know that it’s important to understand the source and composition of data—particularly when using self-reported results, drawing from multiple sources, and creating a composite perspective.

Nevin E. Adams, JD

(1) The 2010 Survey of Consumer Finances is available here.

(2) As of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in nearly 65,000 employer-sponsored 401(k) plans, representing $1.414 trillion in assets. The 2010 EBRI/ICI database covered 46 percent of the universe of 401(k) plan participants, and 47 percent of 401(k) plan assets.

(3) When analyzing the change in participant account balances over time, it is important to have a consistent sample. Comparing average account balances across different year-end snapshots can lead to false conclusions. For example, the addition of a large number of new plans (arguably a good event) to the database would tend to pull down the average account balance, which could then be mistakenly described as an indication that balances are declining, but actually would tell us nothing about consistently participating workers.

“Consistent” Messages

By some accounts, inertia has long been the bane of the voluntary retirement system—and a great deal of money and time has been spent overcoming the reluctance of workers to become savers, and of savers to do so at levels sufficient to achieve their retirement goals.

That same inertia likely accounts for the fact that, once set on a savings course, or better still, set on one that improves on that initial setting,¹ participants in overwhelming numbers appear to “stay the course”—and do so through good times and times that aren’t as good.

So, what happens to those participants who stay the course, those“steady,” consistent participants?

The Employee Benefit Research Institute (EBRI), through the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, has long tracked the changes in consistent participant accounts in a database that is the largest, most representative repository of information about individual 401(k) plan participant accounts in the world.² The EBRI/ICI project is unique because it includes data provided by a wide variety of plan recordkeepers and, therefore, portrays the activity of participants in 401(k) plans of varying sizes—from very large corporations to small businesses—with a variety of investment options.

Drawing from that database, which includes demographic, contribution, asset allocation, and loan and withdrawal activity information for millions of participants, EBRI has for years produced estimates of the cumulative changes in average account balances—both as a result of contributions and investment returns—for several combinations of participant age and tenure.

And, for those millions of individual participant accounts in the database, we are able to project changes in those average balances based on actual individual rates of contribution and the investment choices in place at a specific point in time.³

As a result, we are able to estimate that the average account balance of an individual ages 25‒34, with one to four years of tenure at his or her current employer,⁴ increased 4.6 percent in June, while a participant ages 55‒64 with 20‒29 years of tenure had an average account increase of 2.5 percent.⁵

This capability is significant for several reasons. It provides a monthly update of a comprehensive perspective on 401(k) account movement. It has provided the ability to quickly and accurately estimate the impact of major market swings on a broad swathe of the 401(k) market.⁶

And it serves to remind us that those 401(k) balances are affected not just by the investment markets, but by the savings we invest—consistently.

-Nevin E. Adams, JD

You can access reports of both cumulative and monthly average account changes at http://www.ebri.org/?fa=401kbalances

¹ Via plan design devices such as automatic enrollment, contribution acceleration, or asset allocation funds that rebalance automatically over time.

² As of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in 64,455 employer-sponsored 401(k) plans, representing $1.414 trillion in assets.

³ That specific point in time being the annual update of recordkeeping information from data providers, currently 12/31/2010. The projections assume no change in behavior (such as deferral rates or interfund transfers).

⁴ For individual participants in the database from December 31, 2010 to the valuation date of June 30, 2012.

⁵ Note that that increase is based on not just investment returns, but also new contributions. Note also that contributions tend to have a larger percentage impact on the rate of growth in smaller accounts.

⁶Perhaps most notably for an Oct. 7, 2008, congressional hearing on “The Impact of the Financial Crisis on Workers’ Retirement Security.” See EBRI’s testimony online here.

The Good Old Days

There’s been a lot of talk lately about the need to fix the “broken”401(k) plan. Some say it disproportionately benefits higher-paid workers, some claim it can’t provide a level of retirement income sufficient to meet lower-income needs, and still others maintain it can’t provide that level of security for anyone. And, as often as not, those sentiments arise as part of a discussion where folks wistfully talk about the “good old days” when everybody had a defined benefit pension, and people didn’t have to worry about saving for retirement.

Only problem is—those “good old days” never really existed, nor were they as good as we “remember” them.

Consider that only a quarter of those age 65 or older had pension income in 1975, the year after ERISA was signed into law. The highest level ever was the early 1990s, when fewer than 4 in 10 (both public-and private-sector workers) reported pension income, according to EBRI tabulations of the 1976–2011 Current Population Survey (in 2010, 34 percent had pension income).

Perhaps more telling is that that pension income, vital as it surely has been for some, represented just 20 percent of all the income received by those 65 and older in 2010. In the “good old days” of 1975, it was less than 15 percent.

In fact, in 1979, just 28 percent of private-sector workers were covered “only” by a defined benefit (DB) plan (another 10 percent were covered by both a DB and a defined contribution plan), according to Department of Labor Form 5500 Summaries. In other words, even in the “good old days” when “everybody” supposedly had a pension, the reality is that most workers in the private sector did not.

Even among those who worked for an employer that offered a pension, most in the private sector weren’t working long enough with a single employer to accumulate the service levels you need for a full pension. Nor is this a recent phenomenon; median job tenure of the total workforce has hovered about four years since the early 1950s (in fact, as EBRI’s latest research points out, the average median job tenure has now risen, 5.2 years).[i] For private-sector workers, fewer than 1 in 5 have ever spent 25 years or more with one employer. Under pension accrual formulas, those kind of numbers mean that even among the workers who qualify for a pension, many are likely to receive a negligible amount because their job tenure is so short.

Ultimately what this suggests is that, even when defined benefit pensions were more prevalent than they are today, most Americans still had to worry about retirement income shortfalls.

Indeed, Americans today do have some additional concerns: longer lives and longer retirements to fund, as well as the attendant issues of higher health care costs and long-term care. For most workers—past and present—the more savings options they have, the better; and the easier we make it for them to save, the better. That is the power of payroll deduction, matching contributions, and employer action.

When all is said and done, we’re all still challenged to find the combination of funding—Social Security, personal savings, and employment-based retirement programs—to provide for a financially satisfying retirement.

Just like in the “good old days.”

- Nevin E. Adams, JD

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[i] EBRI Notes, December 2010, http://www.ebri.org/pdf/notespdf/EBRI_Notes_12-Dec10.Tenure-CEHCS.pdf

Single Best Answer?

A mainstay of multiple-choice test instruction is the admonition to select the “single best answer.” Now, generally there really is only one valid answer, but there are times when the questions posed are sufficiently imprecise, or the potential answers specific, that more than one response is viable. That’s where the test architect can always fall back on their notion of “best” answer– because, even if a credible argument can be made for an alternative, it’s a lot easier to grade when there’s only a single, pre-determined result.

When it comes to projecting possible outcomes in situations where there might be hundreds, perhaps thousands, or even millions of different results, it’s not uncommon to pick a single point to focus on. For example, projections in financial analysis might use the most likely rate of claim, the most likely investment return, or the most likely rate of inflation, whereas projections in engineering analysis might use both the most likely rate and the most critical rate. That choice provides a point estimate, one that ostensibly provides a best single estimate for purposes of analysis.

The downside of this approach, of course, is that it does not fully cover the fact that there is a whole range of possible outcomes, some more probable, some less. The alternative, a stochastic modeling, doesn’t just pick a single likely result, but uses random variations to look at what a broad range of conditions might be like. It does this based on a set of random outcomes, projects results, and then repeats with a new set of random variables. In fact, this process is repeated thousands of times.
When the modeling is done, you can look at a distribution of outcomes – and with that not only consider the most likely estimate, but what ranges are reasonable as well. It is, quite simply, a more complete and realistic assessment of potential outcomes, because, unlike so-called “deterministic” models that rely on picking a single point of experience, it includes a wide range of possibilities.

Deterministic models can predict outcomes under a few economic and demographic scenarios but don’t generally present a distribution of the wide range of scenarios that could arise from different combinations of economic and demographic variable values. Only stochastic models – like that embodied in the EBRI Retirement Security Projection Model® (RSPM) - can measure the "risk" of their performance measure values, because stochastic models, using Monte Carlo methods, are based on probability distributions. Said another way, stochastic modeling brings into account the volatility and variability of experience that are part of living in the real world.

Those deterministic models may offer a “single” answer, but life is rarely that simple – and projections that attempt to help us make better decisions about the future needn’t be.

- Nevin E. Adams, JD

1. The EBRI Retirement Security Projection Model®(RSPM) simulates 1,000 alternative retirement paths for each household to explicitly model investment, longevity and stochastic healthcare risks (i.e., nursing home and home healthcare costs).

2. More information on stochastic versus static/deterministic modeling can be found here.

”Macro” Management

Last week, Senate Finance Committee Chairman Max Baucus (D-MT) outlined his overall goals for comprehensive tax reform, noting that he planned to use both the Domenici-Rivlin debt reduction plan and the fiscal recommendations of the president's Simpson-Bowles Commission(1) as the“starting points for full-scale tax reform,” citing the former in commenting that “‘Everything must be on the table' when it comes to tax and entitlement reform." The New York Times last Monday reported a “Push for a Fiscal Pact Picks Up Speed, and Power,” even as other published reports suggested that lawmakers would look to defer those votes until after the November elections.

Those headlines echoed the sense that EBRI CEO and President Dallas Salisbury outlined last month to the EBRI board of trustees at their spring meeting—a sense that broad-based tax reform would be the focus of Congress, with fiscal issues driving a focus on the macro impact of policies rather than the micro outcomes that might result. While there’s an acknowledgement that the“devil’s in the details,” there is also a growing sense that sweeping change is needed, and that—whatever the potential negative effects at the micro level, enacting change would be supported because it was seen as “best for the nation and the economy.”

Salisbury cited a meeting at which a senior congressional staffer noted that when Congress did act, it would include changes in the tax treatment of retirement plans—“we just can’t tell you what.” Later at that same meeting, a more senior official made it even clearer that those issues would be part of the equation, going so far as to outline about a half dozen specific provisions under consideration. Salisbury highlighted as“the most telling words in that senior staffer’s presentation” that “the biggest roadblock to meaningful action toward a rational retirement policy was“inter-industry competition”—the competition of firms within the retirement plan industry lobbying for different provisions, all of which carry a cost to the federal government, but with no one willing to suggest ways to pay for their proposals.

“If there is a message,” Salisbury noted, “it is that whatever the government is willing to spend on retirement in the future is less than they are now willing to spend.” Not that there isn’t interest in broader policy objectives, such as increasing the number of individuals covered by retirement programs; however, the sense is that the expense to the government of any new initiatives (such as “automatic”IRAs) would have to come from current tax preferences for other programs. “It’s less than a zero sum game,” Salisbury told the group.

Salisbury cited the comments made by Jim VandeHei, executive editor of Politico, at another recent event, who spoke of a dynamic of policy and party volatility in the near-term, with, at the extreme, control of at least one house of Congress changing every two years for the next decade. VandeHei noted that with the electorate so polarized, at the margins, he expects the presidential election in a number of states to be decided by extremely narrow margins, such as 1,000 to 4,000 votes. Moreover, because of the primary process, the extremes rule in both political parties. The resulting political polarization means that fiscal constraints dominate all discussions on Capitol Hill.

Salisbury noted that proposals to reduce Social Security, the sole source of retirement income for 37 percent of today’s retirees—or Medicare—will widen the current retirement savings gap, as will any reduction in retirement plan tax preferences, or that of workplace-based healthcare programs. “That diminishes an individual’s ability and/or willingness to retire—and that has an impact on employers, and workforce management,” he noted. That also means less capacity in the retired population to consume goods and services—a potentially critical factor in the nation’s future economic growth as well.

As we approach the end of 2012, there is potential for massive political and economic chaos, Salisbury said, because of the concurrent scheduled expiration of the Bush administration tax cuts, the impact of federal budget sequestration and its automatic spending cuts due to hit at year-end, the end of the (extended) payroll tax “holiday,” and the likely need to approve an increase in the nation’s debt ceiling shortly thereafter. The sense is that House Speaker John Boehner (R-OH) will have less control in the next Congress than the current one, assuming Republicans maintain the majority in that chamber. Meanwhile, in the Senate, regardless of which political party wins control, “60 is the new 50”—meaning that a super-majority of votes will be needed to break a filibuster and pass major legislation..

Salisbury suggested that “it’s all going to happen during the last breathing moments of the current Congress,” reflecting a sense that lame-duck members of the U.S. House and Senate – those who won’t be part of the next Congress - will be willing to cast otherwise politically risky votes in order to make something meaningful happen. The strategy: Let everything “hit the fan” on December 31, which would, among other things, restore higher tax rates. At that point, ANY change that reduces those “new” rates can be seen as a tax cut, rather than an increase. In effect, that means that the current Congress can vote for things on January 2 that would have been tagged a tax hike on December 31, but that on January 2 will be deemed a tax cut. This would all have to occur in the narrow window between the end of the calendar year and the start of the new 113^th Congress. Newly elected (but not yet seated) lawmakers avoid even having to vote, noted Salisbury. (Incidentally, the New York Times reported on a similar scenario this past week, a month behind Salisbury.)

Salisbury said that the highest probability for this outcome is if the status quo emerges from the 2012 election – the Senate split 50/50, the House remains in GOP control, and President Obama is reelected—“because all three will have a huge stake in things being solved, since they are going to have to live with it over the next four years.”

On the other hand, he noted, if there is a change in the balance of power—such that one party doesn’t have to live with the consequences of it, that the result can be blamed on the other party—lawmakers might defer action.

In any event, Salisbury noted that if the 2012 election produces the “status quo” in party alignments, that by early January, we will not only know what the Supreme Court has decided on healthcare, we may know what the tax status of workplace plans and programs like Social Security and Medicare, and then we can know what we’ll be dealing with. If action is deferred, there will be no letup from uncertainty.

“The macro, not the micro is driving policy,” Salisbury noted. “This is about saving the economy.” But with everybody focused on macro, he added, “HR execs will have to deal with the impact on the micro.” And, with trust in employers very high by both current workers and retirees,“individuals are likely to turn to employers even more than they do today to help them achieve health and financial security, including retirement security.”

- Nevin E. Adams, JD

Notes

(1) EBRI has run multiple simulations on these proposals, and their potential impact on retirement savings. See EBRI Notes, March 2012, “Modifying the Federal Tax Treatment of 401(k) PlanContributions: Projected Impact on Participant Account Balances;” EBRI Issue Brief #360, July 2011, “Employment-Based Health Benefitsand Taxation: Implications of Efforts to Reduce the Deficit and National Debt;”and EBRI Issue Brief #364, November 2011, “Tax Reform Options: Promoting Retirement Security.”

Returns “Engagement”

An acquaintance of mine once remarked, “you can’t solve a savings problem with investment returns.” Yet, participants frequently focus on the returns of their retirement savings investments.

Consider that during the month of May, major stock indexes like the Dow Jones Industrial Average and the S&P 500 were off 6 percent. But, according to an EBRI analysis, the estimated average 401(k) account balance¹was down less than 3 percent during that same month, both due to the inflow of ongoing contributions and more diversified portfolio holdings.

That determination is based on estimates from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project—the largest, most representative repository of information about individual 401(k) plan participant accounts. In fact, as of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in nearly 65,000 employer-sponsored 401(k) plans, representing $1.414 trillion in assets.

Using that database, which includes demographic, contribution, asset allocation, and loan and withdrawal activity information for millions of participants, EBRI has produced estimates of the cumulative changes in account balances—both as a result of contributions and investment returns— for several combinations of participant age and tenure.

While the estimated monthly movements² are interesting, they aren’t nearly as important as the perspective the database offers on long-term trends. For example, while the financial crisis of 2008 had a significant impact on retirement savings balances, as of June 5, 2012, more than 94 percent of the consistent participants in the database are estimated to have balances higher than they did at the pre-recession market peak (October 9, 2007).

During election cycles, voters are frequently asked “are you better off now than you were four years ago?” The answer, at least when it comes to consistent participants and their retirement savings accumulations, would seem to be “yes.”

- Nevin E. Adams, JD

Notes

¹ For “consistent” participants, that is, participants assumed to be in the 401(k) plan at the beginning and end of the specific reporting period.

² EBRI updates the change in 401(k) balances each month at http://www.ebri.org/index.cfm?fa=401kbalances. Here you will find both a listing of “Cumulative Change”, a projected cumulative percentage change in account balances for consistent participants since the last annual update of the database. Additionally, the monthly rate of change in average account balances is presented for those same individuals. For assistance on interpreting these results, please contact Jack VanDerhei at vanderhei@ebri.org

“Better” Pill?

As a growing number of Americans near and enter retirement, concerns about the cost of post-retirement health care expenses loom larger. In fact, worker confidence about their ability to pay for medical expenses after retirement was just half what they expressed about their ability to pay for basic retirement expenses (see EBRI’s2012 Retirement Confidence Survey).

Little wonder, since a recent EBRI Issue Brief noted that health-related expenses are not only the second-largest component in the budget of older Americans, they are the only component which steadily increases with age (see “Expenditure Patterns of Older Americans, 2001‒2009”).

Recognizing the potential financial impact, recent industry surveys have put a figure on the cost of post-retirement health care expense¹—a figure above and beyond that of merely living in retirement. EBRI has gone to great lengths to model the major risks to retirement income adequacy all the way back to the introduction of the EBRI Retirement Savings Projection Model (RSPM)® in 2003, including the incorporation of stochastic health care risks, such as nursing home and home health care costs.²

The RSPM has incorporated those expenses because, while those events will not be experienced by all retired households, or experienced to the same extent, when they do occur they can have catastrophic financial consequences for a household’s future retirement income adequacy. Many attempts to model retirement income adequacy either ignore this risk altogether, or just assume that all households purchase long-term care insurance at retirement—the former ignores a significant financial reality, while the latter glosses over reality.

Indeed, a major limitation of using income replacement rates as an accumulation target is that doing so generally fails to take into account these potentially catastrophic costs. How much difference does this make? A recently updated version of the RSPM³ shows that, with the financial impacts of long-term care (nursing home and home health care costs)modeled, 68 percent of single male Gen Xers are projected to have no financial shortfall in retirement. On the other hand, if those long-term care costs are ignored, fewer than one-in-ten would be projected to run short of funds in retirement. Similar results were found for single female and married Gen Xers.

The gaps are even more noticeable if you focus only on the situation of individuals with projected shortfalls in excess of $100,000. Ignoring long-term care costs, fewer than 1 percent of single male or married Gen Xers are projected to have shortfalls in excess of $100,000; however when you take those costs into account, approximately 18 percent of single males and 10 percent of families are now in this range, according to the model. The results are even more pronounced for single females, where ignoring those long-term care costs would indicate that fewer than 5 percent are modeled to experience shortfalls of more than $100,000, compared with approximately 34 percent when this reality is factored in.

It’s clear that those long-term care costs can be significant, and can have a dramatic impact on retirement security.

What’s less clear is why projections of retirement income needs and preparedness would continue to overlook them.

Nevin E. Adams, JD

Notes

(1) For more information, see “The Impact of Repealing PPACA on Savings Needed for Health Expenses for Persons Eligible for Medicare,” EBRI Notes, August 2011, online here.

(2) The Retirement Security Projection Model® (RSPM) was developed in 2003, and in 2010 it was updated it to incorporate several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans, and the recent crises in the financial and housing markets. EBRI has recently updated RSPM to account for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010. For more information on the RSPM, check out the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,®” online here.

(3) More information about this update will be published in June 2012 EBRI Notes.