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Retirement Risk Isn't Just a Middle-Class Problem

Many affluent households also face significant challenges.

Retirement planning is all about the income. But more than that, it’s about your clients’ ability to replace working income in retirement, that is, maintaining a standard of living.

Many retirement analysts, myself included, have focused on the likelihood that many middle- and lower-income households must confront the risk of a falling standard of living in retirement. Falling Social Security replacement rates, the decline of defined benefit pensions and defined benefit plans that cover only half the working population all point toward trouble for a majority of retirees.

But here’s something I find equally striking: Many affluent households also face significant retirement risk. These are the people most likely to work with financial planners, and the numbers tell us there’s plenty of reason to worry here, too.

The latest National Retirement Risk Index, published by the Center for Retirement Research at Boston College using data from the Federal Reserve’s triennial Survey of Consumer Finances, finds that in 2019, 41% of households with high median incomes were at risk of a falling standard of living in retirement. That's down a bit from 43% in 2010, but substantially higher than in 2004, when 36% were at risk. The numbers look a little better when measured using a "wealth" yardstick rather than income: 28% of affluent households were at risk in 2019.

And the NRRI's income assumptions, arguably, lean optimistic. For instance, its income projections assume that all households annuitize all of their assets and that they tap home equity via a reverse mortgage. A relatively small share of households make either of those moves, let alone both.

The SCF breaks household income into thirds. For the top third, the median income for a single person in her mid-40s is $85,000; for couples, it’s $248,000. But there’s plenty of variation within this group. At the lower end, many will receive a significant amount of their retirement income from Social Security. But pre-retirement income replacement rates are falling due to the higher full retirement age mandated by the Social Security reforms of 1983. For everyone born in 1960 or later, the FRA is 67, compared with 65 before those reforms were enacted. Every year increase in the FRA equates roughly to a 6.5% cut in benefits.

Wealthier households also have a higher bar to clear, notes Anqi Chen, senior research economist and assistant director of savings research at CRR. “They have a higher standard of living to replace in order to maintain their standard of living, because they have earned more.” But CRR also has observed another worrisome trend among wealthier households, she adds. “More affluent households are more likely to have two earners, but in some cases only one of them is saving for retirement.”

A separate CRR report explores this phenomenon. It notes that since only about half of private sector workers have a workplace retirement plan at any given time, it’s often the case that only one person in a dual-earner couple is saving. “Their target saving rate should be higher,” Chen says. But the report concludes that the spouse who is contributing often doesn’t recognize the need to pick up the slack for the nonsaving spouse.

“Planners should make sure when they’re working with couples that both are saving,” she says. “If only one is eligible, that spouse should be contributing for both.”

But the NRRI also should give you pause if you don’t think wealthier households will need Social Security in retirement. CRR and other researchers have found that most people underestimate the risk of outliving financial resources. They tend to rank stock market risk, inflation and even changes in retirement policy higher than longevity risk.

And this risk actually is higher for wealthier people, since they tend to rely less on Social Security and more on savings, which can be exhausted at advanced ages. Risk also rises for widows, since total household Social Security income falls when one spouse dies—typically by about one-third. Some expenses fall as well, but poverty rates, nonetheless, tend to rise in these situations.

Inflation and markets are top of mind these days for both workers and retirees. Taken together, these two headline-grabbing topics have shaken client confidence in a way not seen since the Great Recession, according to the 2023 Retirement Confidence Survey, conducted by the Employee Benefit Research Institute. The survey was fielded during January this year, fresh on the heels of the sharp 2022 market declines and red-hot inflation.

This year, 64% of workers said they are confident about their ability to live comfortably throughout retirement, down significantly from 73% in 2022. Among current retirees, the comparable figures fell from 77% to 73%. The last time those figures fell that sharply was in 2008, when the U.S. was in the grip of the global financial crisis, according to EBRI.

For clients, the NRRI points to the need to focus on building savings early and to consider strategies for working longer and delaying Social Security filing. 

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to Morningstar and the AARP magazine.

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