Household Equity Adds Little to Retirement Income

Authors Alicia Munnell and Mauricio Soto reported in the first report that Social Security benefits on average replace about 44% of retirement income for both couples and single individuals (See Measuring Income From Social Security). The second report painted an even brighter picture for those retiring with both Social Security and pension income, saying that most are able to enjoy 65% to 75% of the income earned during their working lives (SeeSocial Security, Pensions Leave Two-Thirds of Retirees in Good Shape).

The current brief assumesthat housing consists of two components – the “imputed rent” that will be consumed over the life of the household and the “residual value.” Imputed rent is the amount that the owner would have to pay to rent an equivalent dwelling and is treated by the authors as an amount that retired homeowners now pay to themselves. The residual value, or amount of home equity that the household could use, the authors include in the numerator of the replacement rate calculation, though they note that not many retirees tap into their home equity.

The authors’ conclusions were as follows:

• Using the Average Indexed Monthly Earnings (AIME), Social Security plus imputed rent creates a 60.2% replacement rate for couples without pensions and a 76.2% replacement rate for couples with pensions.
• Using AIME, Social Security plus imputed rent creates a 62.2% replacement rate for singles without pensions and an 87.9% replacement rate for singles with pensions.
• Using the best five out of 10 pre-retirement salary years, Social Security plus imputed rent creates a replacement rate of 50.2% for couples without pensions and 63.1% for couples without pensions.
• Using the best five out of 10 pre-retirement salary years, Social Security plus imputed rent creates a 50.8% replacement rate for singles without pensions and a 70% replacement rate for singles with pensions.

When the authors add residual value to the numerator, the replacement rates are as follows:

• AIME: 62.3% for couples without pensions, 78.5% for couples with pensions.
• AIME: 63.3% for singles without pensions, 89.3% for singles with pensions.
• Best five out of 10 salary years: 52.1% for couples without pensions, 64.9% for couples with pensions.
• Best five out of 10 salary years: 52.8% singles without pensions, 72.1% singles with pensions.

The authors conclude that household value, while increasing replacement rates, does not considerably increase them. As they concluded in their second brief, households with pensions are in good shape in retirement, and this represents about two-thirds of American households. Those without pensions are not in good shape.

Again the authors note that changes are in store for the coming retirement of baby boomers who will see “lower replacement rates from Social Security and less certain income from employer pensions.”

The full report is here .