Last year was a good year for Baby Boomers and Generation X households saving for retirement. However, factors like age, income, and especially access to an employment-based 401(k)-type retirement plan continue to produce significant individual differences. The gains in the financial markets and housing values means that more households will have adequate resources in retirement.
The analysis performed by EBRI found that the Retirement Readiness RatingsTM (RRR) could be impacted greatly by the following on a case-by-case basis:
- Eligibility for participation in an employer-sponsored 401(k)-type plan remains one of the most important factors for retirement income adequacy. Gen Xers in the lowest-income quartile with 20 or more years of future eligibility in a defined contribution plan are half as likely to run short of money as those with no years of future eligibility, while those in the middle-income quartiles experience increases in RRR values by 27.1 to 30.3 percentage points.
- The risks of a long life and high health-care costs drive huge variations in retirement income adequacy. For both of these factors, a comparison between the most “risky” quartile with the least risky quartile shows a spread of approximately 30 percentage points for the lowest income range, approximately 25 to 40 percentage points for the highest income range, and even larger spreads for those in the middle income ranges.
- Annuities and long-term care insurance could mitigate much of the variability in retirement income adequacy at or near retirement age. For example, the annuitization of a portion of the defined contribution and individual retirement account (IRA) balances may substantially increase the probability of not running short of money in retirement,. Moreover, a well-functioning market in long-term care insurance would appear to provide additional support.