Despite a 45 percent increase in the stock market since 2010 and a 6 percent increase in housing values during the same period (in inflation-adjusted terms), about 50 percent of people older than 65 are still likely to be unable to maintain their standard of living in retirement, according to a study by the Center for Retirement Research at Boston College.
The center's calculation, known as the National Retirement Risk Index, is based on the Federal Reserve's Survey of Consumer Finance, a triennial survey of U.S. households. The most recent survey is 2010. The 2013 survey isn't available yet.
In 2010, the index showed that even if households headed by 65-year-olds annuitized all their income and took out reverse mortgages in an effort to maximize their resources, 53 percent of households were at risk. Given the improvement in housing values and stock portfolios, it would seem like the state of retirement planning would be significantly better in 2013. But the retirement picture improves only by 3 percentage points, so that 50 percent of households are at risk instead of 53 percent, the center found.
The explanation is simple, says Anthony Webb, a research economist for the center.
- About 89 percent of all stocks are owned by people in the top third of the income spectrum, so average people didn't benefit from the rising stock market.
- Social Security's full retirement age has risen for an increasing number of people compared to 2010, effectively lowering benefits. In other words, the further from full retirement age you are when you claim, the less you get.
- Interest rates continue to be low, and that has an impact on how much income households can squeeze out of savings as well as the amount of money available from annuitization and from reverse mortgages.
- Home values are much more significant for lower-income retirees than they are for wealthier older people, and even though they've risen 6 percent since 2010, that doesn't make up for the Great Recession's hefty decline.
- People are living longer, so they'll need more total income to pay for that increased longevity.
What is the answer? Webb says most people have three choices. They can work longer, save more or accept a drop in their standard of living after they retire.
"The trouble is that some households don't have much choice. If they are in poor health or lose their jobs, these households may have unpalatable choices," Webb says.
"If you have a job and you are in good health, there is a lot to be said for working longer," he adds.