How close are today’s pre-retirees to being retirement ready? While there is still work to be done, the answer is closer than we might have expected. That’s the good news from a recent analysis by BlackRock and the Employee Benefit Research Institute (EBRI). The less-than-good news is that U.S. workers closest to retirement, and with the least amount of time left to bulk up their savings, are the ones who have the most work to do.
Here is how we examined the question of retirement readiness. According to many financial advisors, you will need to replace about 80% of your income in retirement1. Many Americans have two primary sources of retirement income, Social Security and retirement savings, usually in 401(k) plans and individual retirement accounts (IRAs). We focused on people in their last decade before the traditional retirement age of 65 to find out if those sources should be enough. And if not, how large is the gap?
We worked with EBRI to determine the median income for U.S. workers currently ages 55, 60 and 64. We then used those numbers to estimate their Social Security retirement benefits at what’s known as their “full retirement age.” Next, we collected the median retirement savings balances of people the same ages who have 401(k) accounts and IRAs in EBRI’s extensive database. Then, we used the BlackRock CoRITM Retirement Indexes to estimate the retirement income that those savings could provide. We introduced the CoRI Retirement Indexes a year ago specifically to help pre-retirees estimate the future income potential of their savings.
We found that the median 55-year-old is already on track to replace 69% of his pre-retirement income. But there is still a 14% gap that median worker needs to close to reach the goal of replacing 80% of pre-retirement income. And the gaps are wider for older pre-retirees. The results are shown in these three pie charts:
Sizing Up The Gap
Percentage of investors’ retirement-income goal estimated to be replaced by income from savings and Social Security, along with the gap, at different ages. All retirement income estimates use a scenario that assumes the median 401(k) and IRA savings of a U.S. investor in each age group, the Social Security payment estimated for the median income for each age group, and age-appropriate CoRI Retirement Index levels as of June 30, 2014. Retirement income goal is 80% of pre-retirement income, a figure commonly referenced by financial planners and reflected in Aon Hewitt’s 2008 Replacement Ratio Study. Retirement is assumed to begin at age 65
The fact that the median 55-year-old is already on track to replace 69% of pre-retirement income is good news, especially since younger pre-retirees should have more time to increase contributions and improve their position. But the 26% gap that the median 64-year-old faces to replace 80% of pre-retirement income is more daunting. And for workers who expect to make up at least some of the difference by staying on the job past age 65, it’s important to note that EBRI’s 2014 Retirement Confidence Survey has found that 49% of retirees left their jobs earlier than they had planned.
One potential mitigating circumstance is that workers in their 60s are far more likely to receive some sort of traditional pension to supplement their retirement. A more detailed review can be found in our first CoRI Retirement Indexes Analysis.
Cost of Future Income Has Risen
It’s worth noting that in the year since we began tracking the cost of future retirement income, the estimated cost of income has increased. For someone age 55, for example, every $1 of lifetime retirement income was estimated to cost $14.09 as of June 30 – a 7.15% increase from what that same income would have cost a 55-year-old a year ago.
The relationship between market returns and the price of future income is a complex one, but in this case, strong market returns may have helped keep many people on track.
Chip Castille, Managing Director, is head of the BlackRock US Retirement Group.
1Aon Hewitt’s 2008 Replacement Ratio Study, which finds that an 80% income replacement rate is needed for single people with $50,000 in pre-retirement income who retire at age 65 to maintain their standard of living. Data is as of 6/30/14 and is subject to change.
The CoRI Retirement Indexes do not guarantee future income or protect against loss of principal. There can be no assurance that an investment strategy based on the CoRI Retirement Indexes will be successful. Indexes are unmanaged and one cannot invest directly in an index.
Examples shown in this material are for informational purposes only and do not represent an actual account. The CoRI Retirement Indexes do not reflect the fees, expenses and cost that may be associated with an annuity or any other retirement income product that an individual may purchase, or any assumption that such a product will be available for purchase at the time of retirement. Actual investment outcomes may vary. A number of factors may contribute to variations in retirement income.
Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction.
This information is the property of BlackRock, Inc. and /or its subsidiaries (collectively, “BlackRock”). It is provided for informational purposes only. The CoRI Retirement Indexes are supported by proprietary BlackRock research about annuity pricing and income generation; the methodology of the CoRI Retirement Indexes are supported by assumptions about the relationship between annuity pricing and fixed income markets, the accuracy of third party reporting and compilation of current annuity pricing, and the predictive nature of the components of the methodology. There is no assurance that these assumptions are correct or will perform in the manner that they have in the past. Although BlackRock obtains information from sources which BlackRock considers reliable, neither BlackRock nor its subsidiaries or any other third party involved in, or related to, compiling, computing or creating the information (collectively, the “BlackRock Parties”) guarantees the accuracy and/or the completeness of any of this information. All BlackRock indices and data are the exclusive property of BlackRock and may not be used in any way without the express written permission of BlackRock.
The CoRI Retirement Indexes are maintained by BlackRock Index Services, LLC (the “Affiliated Index Provider”), a subsidiary of BlackRock, Inc., that designs, sponsors and publishes indices for use in portfolio benchmarking and portfolio management. While the Affiliated Index Provider publishes descriptions of what the CoRI Retirement Indexes are designed to achieve, the Affiliated Index Provider does not provide any warranty or accept any liability in relation to quality, accuracy or completeness of data in respect of the CoRI Retirement Indexes, and does not guarantee that the CoRI Retirement Indexes will not deviate from their stated methodologies. The Affiliated Index Provider does not provide any warranty or guarantee for Affiliated Index Provider errors.