Savings Goals Should Consider ‘Longevity Risk’

Factor the “risk” of living longer into participants’ financial planning

By Stephen Miller, CEBS Feb 19, 2015
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A February 2015 issue brief from the nonprofit Employee Benefit Research Institute (EBRI) demonstrates the effect of “longevity risk” (the higher costs of living a long time), including nursing home and home health care costs, on retirement savings shortfalls—the gap between what employees have saved for retirement and what they are likely to need to fund their retirement years adequately.

Among the findings presented in Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model are the following:

  • For those on the verge of retirement (early Baby Boomers), retirement savings deficits, on average, vary from $19,304 (per individual) for married households, increasing to $33,778 for single males and $62,734 for single females.
  • Looking only at early Boomers considered to be “at risk” (somewhat less than half of those modeled), the shortfalls are markedly higher, from $71,299 (per individual) for married households, increasing to $93,576 for single males and $104,821 for single females.
  • Retirement savings shortfalls are much smaller for Generation X employees with significant years of future eligibility for defined contribution plan participation.

(View a chart of 2014 retirement savings shortfalls by age cohort, marital status and gender.)

Catastrophic Consequences

Health care needs such as nursing home and home health care costs “can have catastrophic financial consequences for the future retirement income adequacy of the household,” according to the report. “Many attempts to model retirement income adequacy either ignore this risk or make the assumption that all households purchase long-term care insurance at retirement,” thus underreporting the extent of the retirement savings gap—and distorting downward the “nest egg” amount employees should be encouraged to accumulate when saving through their 401(k) or other defined contribution plans.

With Age, Anticipate Unexpected Health Costs

Average annual out-of-pocket health care cost for a household between 65–74 years old was $4,383 in 2011, which accounted for 11 percent of total household expenses. That shoots up for households ages 85 and above to $6,603 a year, or 19 percent of total household expenses, notes a companion February 2015 EBRI issue brief, Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees.

“Health care is one of the key components of retirement expenses, and is the only part of household expenditures that increase with age,” said Sudipto Banerjee, EBRI research associate and author of the report. “While some of these costs are more predictable, others are uncertain, and for many people these expenses spike toward the end of life when resources are slim. To successfully manage your resources in retirement, a good plan may include separate preparations for each,” which can mean budgeting separately for recurring and nonrecurring health costs.

Overnight hospital stays, overnight nursing-home stays, outpatient surgery, home health care and usage of special facilities are categorized as nonrecurring health care services.


Stephen Miller
, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related SHRM Article:

Progress in Tamping Down 401(k) Loans and Withdrawals, SHRM Online Benefits, February 2015

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