New Retirement Risk Index

Earlier this month, the Center for Retirement Research (CRR) at Boston College published a briefing on their new Retirement Risk Index.

As you might expect, most of the report is pretty dull, without much of any interest to anyone other than a statistics geek like me. There are a couple of notes in the text though, that I thought I’d point out to you, as they indicate some trends that you may be able to identify with, or they might just spur you into taking some actions for yourself and your family.

Social Security Replacement Ratio. The first interesting fact that the CRR found is that, for the foreseeable future, the rate at which Social Security is expected to replace your salary upon retirement will continue to erode. This isn’t a shocking revelation, we’ve expected it and quite often incorporate this fact into retirement plans, but this report is the first I’ve seen where actual projections are being made as to the rate of the erosion.

The report indicates that the replacement ratio for 1992-2002 was 40%, when Medicare Part B deduction is taken into account. The projection is that, by 2030, when the first of Generation X will be ready to retire, the replacement ratio will be approximately 33%. This represents a reduction in the real purchasing power of the payments of approximately 17.5% - meaning that you’ll either have to make up that much more with your retirement account, or you’ll need to tighten your belt that much more.

The Risk Index. What the index itself indicates is that there is a certain segment of our population that is “at risk” of having inadequate income for retirement. Overall, the CRR says that 43% of all households are “at risk”. When you take that figure and apply it to those around you, it quickly becomes apparent that we’re going to have a major problem as folks begin to retire – especially the very large “Boomer” generation. Nearly one out of every two households are considered “at risk”.

For the earlier Boomers, born 1946-1954, the figure is a little better, at approximately one out of three at risk. Perhaps this means that as folks get nearer to retirement, they “see the light” and are making up the difference where possible. I hope so.