Many Americans are likely to run out of money in retirement. Almost half (47 percent) of early baby boomers currently ages 56 to 62 are at risk of outliving their retirement savings, according to a new Employee Benefit Research Institute study. Even among late boomers ages 46 to 55 and generation Xers ages 36 to 45, who still have plenty of time to save for retirement, 43 percent and 45 percent respectively are at risk of not having enough money to pay for basic retirement expenses.
Predictably, households with the lowest third of pre-retirement income are the most at risk of falling short in retirement (70 percent). But there’s also a significant possibility that middle income workers (42 percent) and even the highest earners (23 percent) will lack sufficient resources to fund their retirement.
Retirement income was estimated in the study by taking into account Social Security, 401(k) and IRA balances, traditional pension and annuity payments, and net home equity. A worker is considered to run short of money if the sum from those sources is not enough to pay for basic living expenses, health insurance premiums and out-of-pocket costs, and nursing home and home health care charges until the point they are picked up by Medicaid. Workers are assumed to retire at age 65 and immediately begin to withdraw money from their retirement accounts to pay for expenses that exceed income from Social Security and traditional pensions if they have one.
Surprisingly, retirement preparedness has actually increased slightly since this analysis was last conducted in 2003. Well over half (59 percent) of early baby boomers were determined to be unprepared in 2003 compared to 47 percent this year. And 80 percent of the lowest income households were projected to outlive their savings in 2003, which dropped to 70 percent this year. “This is likely due to the impact of switching to automatic enrollment 401(k) plans while the worker is young enough to benefit from the new plan design for several years prior to retirement,” write EBRI research director Jack VanDerhei and senior research associate Craig Copeland.
The Pension Protection Act of 2006 made it easier for companies to automatically enroll workers in retirement accounts, which increased the number of people participating in 401(k) plans. Workers with access to a retirement plan at work are significantly less likely to be at risk of running out of money in retirement. For example, among generation Xers with a 401(k) plan, 20 percent have a high probability of outliving their savings. Workers the same age who who don't have access to a retirement account at work have a 60 percent chance of not being able to retire comfortably.