More Than Four in Ten Households Wrong About Retirement Readiness

Researchers suggest more education could help.

Nineteen percent of households who are at risk for being financially unprepared in retirement feel they are not at risk, while 24% of households who are not at risk, feel they are at risk, according to research from the Center for Retirement Research at Boston College.

The researchers compared individual self-assessments of retirement preparedness with the Center’s National Retirement Risk Index (NRRI), which is based on the Federal Reserve’s triennial Survey of Consumer Finances.

The variables explaining what causes a household to be either “too worried” or “not worried enough” include: risk aversion, home ownership, type of retirement plan, education, household type, and income and age group, according to an Issue Brief written by the researchers. They explain that the likelihood of being in the “too worried” group stems mainly from not fully recognizing the value of potential income from owning a home, being covered by a defined benefit plan, and being eligible for a 50% spousal benefit from Social Security.  “A little education about the value of various sources of retirement income could reduce the size of the ‘too worried’ group,” the researchers suggest.

The Issue Brief points out that the real danger in terms of misperceptions is being in the “not worried enough” group. The key drivers of being “not worried enough” are having a defined contribution plan and being in the high-income group. Households with a 401(k) may suffer from “wealth illusion,” not recognizing how little income can be derived from their defined contribution balances.  In addition, high-income households may not recognize how much wealth accumulation is required to maintain their standard of living. “The 19% of households that do not recognize that they are at risk are unlikely to undertake remedial action,” the researchers says. “Perhaps better educational efforts could help here too, such as focusing more on the amount of retirement income that a given 401(k) balance could produce rather than the total account balance.”

Not all households are wrong about their preparedness for retirement. The Issue Brief notes that in the aggregate, households’ self-assessments closely mirror the results produced by the NRRI, suggesting that inadequate retirement preparedness is a widespread problem. Even on a household-by-household basis, nearly 60% of households’ self-assessments agree with their NRRI predictions.

The Issue Brief may be downloaded from here.