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More Bad News on the State of Retirement Readiness

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A few months ago, we published this article addressing the woefully inadequate level of American financial literacy as it relates to retirement saving and investing. This newly released issue brief from EBRI (Employee Benefit Research Institute) highlights the consequences that we are starting to see as the 75 million Baby Boomers are retiring at the rate of about 10,000 per day.

EBRI assigns a “Retirement Readiness Rating” based on the probability that a household will not run short of money in retirement, and they calculate a “Retirement Savings Shortfall” which is the amount of extra savings needed to bring the Retirement Readiness Rating to an acceptable level. The EBRI researchers found these average shortfalls for those on the verge of retirement (Early Baby Boomers) to be $19,304 (per individual) for married couples, increasing to $33,778 for single males and $62,734 for females. One reason why the deficit is larger for females is their longer life expectancies. The other primary risk facing retirees aside from longevity are high health care costs, especially long term care and home health care. The authors estimate that these costs account for about 74% of the shortfall. Furthermore, those who are fortunate enough to be in the highest quartile of longevity have an average shortfall that is almost 15 times greater than those in the lowest quartile.

One problem with the shortfall numbers above is that they include the folks who have saved more than enough, and once we eliminate them, we are looking at deficits of $71,299 (per individual) for married couples, $93,576 for single males, and $104,821 for single females. The one bright spot in this otherwise dismal picture is Generation X whose members have many more years to save. Of course, their ability to save will depend on their access to a decent retirement savings plan. Those without access are estimated to have a shortfall of $78,297 per individual, and those with access through retirement have a more manageable deficit of $16,782.

The aggregate national Retirement Savings Shortfall is currently estimated to be $4.13 trillion, assuming that Social Security pays all the benefits that are currently promised. However, as the 2014 Social Security Trustees Report states, under current taxation and benefit rules, the Social Security trust fund is projected to be depleted in 2033, after which taxes will be sufficient to pay about 75% of benefits. Under this scenario, the shortfall increases to $4.38 trillion. Of course, if Social Security taxes are increased, it will become more difficult to save, so there are no easy answers here.

We at Index Fund Advisors will continue to keep an eye on this situation, and we will continue to share our thoughts with you. Regarding the question of whether the retirement of the baby boomers poses a threat to the market, we addressed that in this article.