It’s a Bleak Road At Retirement If You Make Less Than Average Wages

The Employee Benefit Research Institute has graced us with another densely written and cripplingly depressing analysis* of the working person’s retirement outlook, and the best way I can think to describe it is: bleak.

Let’s take a look at one of the charts:

The Impact of Deferring Retirement Age on Retirement Income Adequacy: Figure 7

Figure 7: Percentage of Baby Boom and Gen X Households Simulated to Have Adequate* Retirement Income for at Least 50% of Simulated Life Paths After Retirement Age, by Preretirement Income Quartiles (tiny type in ALT text)

Hey look, everything is going up, so that must mean “good”, right?  Wrong-o.  What this chart is showing is what percentage of a given income quartile** would have a fifty-fifty change of having enough money for retirement.  Bear in mind, most people don’t accept 50/50 odds of retiring and still retire.***  So, when you see the lines rise, It’s showing that larger and larger portions of the Baby Boom and Generation X population are able to retire with a 50% chance of success.  I think you would agree with me that this is to be expected.

What I really want to call you attention to is the y-axis.  At age 65 (which is usually considered “retirement age”), you can see that 90% of the top quartile can expect a 50/50 chance of retirement success.  Now look at the lowest quartile: 30%.  Look to the right on the chart, the lowest quartile finally catches up to the top quartile at age 84.

Now, let’s take a look at the same chart, but let’s shoot for a 70% success rate:

The Impact of Deferring Retirement Age on Retirement Income Adequacy: Figure 8

Percentage of Baby Boom and Gen X Households Simulated to Have Adequate* Retirement Income for at Least 70% of Simulated Life Paths After Retirement Age, by Preretirement Income Quartiles (tiny type in ALT text)

To give you sense of perspective, there are many financial planners who consider a 70% success rate to be the minimum projected success rate (in their models) to advise a client to retire.  Even then, those financial planners are likely to advise the client to be extremely vigilant of their spending and would watch their client’s assets with an eagle eye.

So, with that in mind, let’s take a look at this chart.  Things don’t look quite as peachy as the 50% chart, now do they?  The expectation is that the top income-earning quartile will have about 76% of the group that can expect to retire with a 70% chance of success.  The lowest income-earning quartile should have about 6% of the group expecting 70% retirement success.  Unbelievable.

What happens when we crank the required success rate up to 80%?

The Impact of Deferring Retirement Age on Retirement Income Adequacy: Figure 9

Percentage of Baby Boom and Gen X Households Simulated to Have Adequate* Retirement Income for at Least 80% of Simulated Life Paths After Retirement Age, by Preretirement Income Quartiles (tiny type in ALT text)

Here the top quartile expects 61% of the group to have an 80% chance of success if they retire at 65, versus a less than 1% chance of success for the bottom quartile.  To put those odds in perspective, it’s akin the odds on scratch-off lottery tickets.

So, what’s the moral of the story?  Let me know in the comments!

*  Jack VanDerhei and Craig Copeland, “The Impact of Deferring Retirement Age on Retirement Income Adequacy,” EBRI Issue Brief, no. 358, (Employee Benefit Research Institute June 2011).

**  A quartile is one-fourth of 100%.  So, the top quartile would be the top 25% of income earners.  The bottom quartile is the lowest 25% of income earners.

***  Think about it.  Would you bet your comfort in old age on the flip of a coin?  Thought not.

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