Contrary to some reports that working just a little bit longer—to age 70—will allow between 80 percent and 90 percent of households to have adequate income in retirement, new research by the nonprofit Employee Benefit Research Institute (EBRI) shows that for approximately one-third of U.S. households between the ages of 30 and 59, that won’t be enough.
The EBRI research stems from projections that large numbers of Baby Boomer and Generation X workers are likely to run short of what they need to cover general expenses and uninsured health care expenses in retirement. The full report is published in the August 2012 EBRI Notes, “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?”
“It would be comforting from a public policy standpoint to assume that merely working to age 70 would be a panacea to the significant challenges of assuring retirement income adequacy, but this may be a particularly risky strategy, especially for the vulnerable group of low-income workers,” noted Jack VanDerhei, EBRI research director and author of the report.
Defer Retirement and Save Through 401(k) Plan
Working longer can, however, have a positive impact. The new research, using results from EBRI’s Retirement Security Projection Model, shows that:
• Nearly two-thirds (64 percent) of U.S. households ages 50‒59 would be considered “ready” for retirement at age 70, compared with 52 percent of those same households if they were to retire at age 65.
• A worker’s participation status in a defined contribution retirement plan at age 65 will be extremely important due to the multi-year consequences for additional employee and employer contributions to the plan.
"Clearly, continuing to work until age 70 would help in enhancing retirement readiness—but continuing to work and participate in a defined contribution plan until age 70 would produce an even more dramatic improvement," the report found.
Catastrophic Health Care Costs
Among the key reasons for the differences between EBRI’s estimates and other models is that EBRI’s research is based on data from millions of actual 401(k) participants and its model incorporates longevity risk, investment risk and the risk of potentially catastrophic health care costs (such as prolonged stays in a nursing home).
“While workers need to make their own decisions on the correct trade-offs of saving today vs. deferring retirement, they should be able to expect that those presenting alternatives be as accurate and complete as possible, avoiding simplistic ’rules of thumb’ that may result in future retirees, through no fault of their own, coming up short,” VanDerhei observed.
Encourage Employees to Defer Adequate Pay to Their 401(k), SHRM Online Benefits Discipline, May 2012
Estimate: Retiring Couples Will Need $240,000 to Pay Health Expenses, SHRM Online Benefits Discipline, May 2012
Secret to a 401(k) Plan’s Success: The Income Replacement Ratio, SHRM Online Benefits Discipline, April 2012
Retirement Preparedness: Adapting to the ‘New Normal,’ SHRM Online Benefits Discipline, September 2009
SHRM Online Benefits DisciplineSHRM Online Retirement Plans Resource Page