Many Unable to Keep Standard of Living in Retirement

November 6, 2012 ( – The National Retirement Risk Index (NRRI) shows that more than half of households may be unable to maintain their standard of living in retirement.

This finding is based on newly released Survey of Consumer Finances. Between 2007 and 2010, the NRRI jumped by nine percentage points because of several factors. The hardest hit households were those nearing retirement and those with high incomes.

Bursting of the housing bubble (4.5 percentage points). The lower the value of housing, the less a household can extract at retirement in the form of a reverse mortgage, and the lower the interest rate, the more a house can borrow through a reverse mortgage. In the 2007 to 2010 period, nominal interest rates decreased sharply. This decline somewhat offset the decrease in the value of housing by increasing the dollar amount that households can potentially withdraw from their houses in retirement. At the same time that gross housing values fell, mortgage debt—which was very high in 2007—remained virtually unchanged. High levels of mortgage debt relative to the value of housing means that some households will not only be ineligible to take out a reverse mortgage, but will also face substantial mortgage payments during retirement.

Falling interest rates (2.2 percentage points). This means that households get less income from annuitizing their wealth. A retiree with $100,000 will receive $492 a month from an inflation-indexed annuity when the real interest rate is 3% compared with $413 per month when it is 1.5%. The NRRI assumes that three types of wealth are annuitized at retirement: financial assets, 401(k) balances, and money received from a reverse mortgage on the household’s primary residence.

Ongoing rise in Social Security’s Full Retirement Age (1.6 percentage points). By 2001, nearly all households were required to wait until at least age 66 and many until age 67 to receive full benefits. The share required to wait until 67 continued to increase for subsequent surveys. Declining Social Security replacement rates at 65—the assumed retirement age in the NRRI—affect all households but have a particularly large impact on low-income households who depend almost entirely on Social Security for retirement income. According to the 2010 Survey of Consumer Finances (SCF), median 401(k)/IRA balances for households approaching retirement were only $120,000.

Continued low stock prices (.8 percentage points). From the peak of the stock market on October 9, 2007—roughly the time that the 2007 SCF was conducted—until the end of the third quarter of 2010—roughly the time of the 2010 survey—the Dow Jones Wilshire 5000 was down 24%. Relative to long-run expected returns, the losses were even greater. The impact of these losses was concentrated among the top third of the income distribution, which holds 86% of all equities.

“The National Retirement Risk Index: An Update” is available here. The data is accompanied by a Prudential white paper “Planning for Retirement: Protecting Retirement Income Against Key Risks.”