Half of U.S. Households Face Retirement Risk
Based on the recent release of the Federal Reserve’s 2019 Survey of Consumer Finances (SCF), as much as half of today’s current American households are at serious risk of not having enough resources in retirement. Some of these risks can be mitigated with financial products including reverse mortgages, but more action is needed to fix the American retirement system.
This is according to Alicia H. Munnell, director of the Center for Retirement Research at Boston College in an editorial at financial news website MarketWatch.
To take appropriate stock of the state of American retirement at the moment, Munnell and her colleagues use the National Retirement Risk Index (NRRI), which compares SCF households’ projected replacement rates — or retirement income as a percentage of pre-retirement income — with target rates “that would allow them to maintain their living standard and then calculates the percentage falling short,” she writes.
After updating important data points and using the new data to calculate the financial and housing wealth of Americans at the age of 65, annuity income is then re-estimated based on reverse mortgage and interest rates. The ultimate results showed some improvement, but that improvement was tepid.
“Because the three years from 2016 to 2019 were a period of solid economic growth accompanied by strong stock and housing markets, we expected the NRRI to have improved in this span. And it did,” she writes. “But the improvement was modest for several reasons.”
One reason is that stock market gains were primarily enjoyed by those who were not already at risk, while another reason is that real interest rates continued to decline, meaning that less value was derived from inherited wealth. A third reason is that a generally positive occurrence — wage growth for lower-income people — was accompanied by lower projected Social Security replacement rates.
2019 data is helpful, but the absence of 2020 data — where the American financial system suffered a notable economic shock that persists today — makes the picture incomplete, Munnell says.
“COVID-19 and the resulting surge in unemployment have inevitably made the situation worse,” she says. “Indeed, our estimate shows that if the SCF had been conducted in 2020 instead of 2019, the NRRI would have been 2 percentage points higher—51% versus 49%.”
That increase may seem very modest, but only serves to reinforce a truth about American retirement that will need to be confronted, she says.
“The bottom line is that updates to the NRRI confirm what we already know — half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes,” she says. “We need to fix our retirement system. Only universal coverage at work will allow workers to accumulate adequate resources to maintain their standard of living.”
Article by Chris Clow on reversemortgagedaily.com