Retirement Risks are Increasing

Each successive generation has a greater risk of being unprepared for retirement

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Retirement is risky business. Giving up your income stream and hoping you have enough saved to cover whatever expenses may crop up is a scary prospect, especially without a pension. It’s a good idea to try to calculate how much you need to save. But the truth is, you don’t know how long you might live and can only hypothesize about what health expenses you may incur.

About 64 percent of Americans are at risk for not being financially prepared to maintain their standard of living in retirement, according to a new Center for Retirement Research at Boston College study underwritten by Nationwide. The estimate was recently updated to include the possibility of long-term care costs, which caused a spike in the number of unprepared households.

“Explicitly including health care in February 2008 raised the [number of unprepared households] from 44 percent to 61 percent and including the cost of long-term care insurance now raises the index to 64 percent,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. “Because the costs of long-term care insurance and other health expenditures are rising and the income system is contracting, these latest findings raise major concerns about the retirement security of baby boomers and succeeding generations.”

The number of households projected to be unable to maintain their current standard of living in retirement increases dramatically for each successive generation. About half (52 percent) of early baby boomers are at risk for being financially unprepared for retirement, compared to 64 percent of late baby boomers and 71 percent of generation Xers, according to Boston College calculations.

Approximately a third of Americans are expected to need nursing home services, but the cost of that care is extremely high. Yet, long-term care insurance is also priced out of reach for many families. The best way to plan for the possibility of long-term care expenses largely depends on your income level. According to Boston College:

“For those in the bottom third of the wealth distribution, the most reasonable strategy is to rely on Medicaid. Those in the top third may be able to self-insure, but more likely they will need to either purchase long-term care insurance or rely on tapping their housing equity to pay for long-term care. Those in the middle third might benefit from long-term care insurance, but may find the price tag too steep, suggesting that they will plan to fall back on Medicaid if their assets are exhausted.”