Higher-Income Americans Aren’t Worried Enough About Retirement: Study

What You Need to Know

A sizable percentage of Americans are either too worried or not worried enough about their financial security in retirement, according to a new study.
Various groups are in danger of saving too little, but even those who do recognize they are in trouble may not act unless prodded.
Households that are not worried enough are the least likely to change their saving or retirement plans.

While a majority of U.S. households have a good sense of whether they are on track for retirement, a sizable percentage of Americans are either too worried or not worried enough about their future financial security, according to a new analysis published by the Center for Retirement Research at Boston College.

High-income households are the most likely to be not worried enough, the research finds.

The analysis, which is based on the newly revamped National Retirement Risk Index, finds those who are not worried enough are more likely to have higher incomes and may misjudge how much their assets could provide.

Notably, various groups are in danger of saving too little, according to the analysis, but even those who do recognize they are in trouble may not act unless prodded.

Overall, some 40% of households are in good shape and know it, according to the CRR, while 20% are in trouble and know it. As such, some 60% of households appear to be well informed about their retirement prospects, the CRR says, leaving 40% flying blind.

Gauging Retirement Risk

As the analysis recounts, the NRRI is based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households.

The risk index calculates, for each household in the Fed survey, a projected retirement income replacement rate as a percentage of pre-retirement earnings. It then compares that replacement rate with a target rate derived from a consumption smoothing model.

Those who fail to come within 10% of the target are defined as “at risk.”

According to the index, about half of working-age households will not be able to maintain their pre-retirement living standard. Moreover, the readiness pattern continues to reflect the health of the economy, raising the possibility that a forthcoming recession could tip even more American households into the at-risk category.

Specifically, the NRRI rose substantially between 2007 and 2010 as a result of the Great Recession, and then recovered slowly from 2013 to 2019 as the economy produced low unemployment, rising wages, strong stock market growth and rising housing prices.

The improvements in the risk gauge during the recovery were modest, however, due to some countervailing longer-term trends, including the gradual rise in Social Security’s full retirement age.

Household Assessments

The Fed survey that is used to construct the NRRI also asks each household to subjectively rate the adequacy of its anticipated retirement income. As the CRR explains, responses to the survey question range from 1 to 5, with 1 being “totally inadequate,” 3 being “enough to maintain living standards,” and 5 being “very satisfactory.”

In this framework, any household that answers with a 1 or 2 considers itself at risk.

“Comparing households’ self-assessed retirement preparedness to the NRRI’s predictions shows that households across the income distribution underestimate their level of risk,” the new analysis states.

Predictive Characteristics

According to the CRR, households that were overly optimistic about the economic recovery after the Great Recession or overestimated how much income their assets could provide appear more likely to be not worried enough.

“Their overconfidence may lead them to underestimate possible risks,” the report warns. “Therefore, it is not surprising that households with higher housing debt-to-asset ratios, relatively low asset balances in 401(k)s and other defined contribution plans, and ‘two earners but only one saver’ households were more likely to be not worried enough.”

On the other hand, unlike overly optimistic households, those who are “too worried” are not aware of how much income they will have in retirement and often have less optimism in the asset markets.

“Characteristics that capture these factors — such as risk aversion, married one-earner households, homeowner, and low self-assessed financial knowledge — predicted households’ likelihood of being too worried,” the analysis explains.

Key Conclusions

According to the CRR, overall, the results suggest that households with incorrect perceptions get it wrong for predictable reasons, and a little education about the value of various sources of retirement income could reduce the size of both the group that worries too much and the group that doesn’t worry enough.

“Despite research showing households have large gaps in financial knowledge, nearly three out of five have a good gut sense of their financial situation,” the analysis concludes. “This share has remained relatively constant despite a 2016 change in the SCF survey. However, classifying households by the accuracy of their perceptions about retirement security does not answer the question of whether they are likely to take remedial action.”

According to the CRR, households that are not worried enough are the least likely to change their saving or retirement plans.

“This group accounts for 28% of households, so a significant portion of the population needs to get a better assessment of their retirement income needs,” the analysis warns. “The additional one-fifth of households that do understand their plight may need less convincing to act, but they still must act.”