Study reveals affluent Americans' complacency towards retirement readiness
A ‘surprising’ trend among high-income households in the US has been discovered: they are the least worried about their retirement readiness and are unlikely to make changes to their savings or retirement plan contributions.
That’s according to a new study by the Center for Retirement Research at Boston College. The report's authors, Anqi Chen, Yimeng Ying, and Alicia Munnell, found that 32% of high-income households are "not worried enough" about their retirement risk, compared to 26% of low- and middle-income earners.
The study categorizes households by income group, defining low-, middle-, and high-income for married couples ages 45 to 47 with median incomes of $50,000, $110,000, and $248,000, respectively.
The report suggests that households with a rosy outlook on the economy's recovery or an overestimation of retirement income from their assets are more likely to fall into the "not worried enough" category.
The research employed the Federal Reserve's Survey of Consumer Finances data to construct the National Retirement Risk Index, which evaluates retirement readiness based on various assets such as Social Security, pensions, home equity, and employer-sponsored retirement plans.
“[Higher-income households’] overconfidence may lead them to underestimate possible risks,” said the report. “Therefore, it is not surprising that households with higher debt-to-asset ratios, relatively low asset balances in 401(k)s, and other DC plans, and two earners but only one saver were more likely to be ‘not worried enough.’”
Furthermore, the report highlights the impact of the housing debt-to-asset ratio on retirement concerns, particularly among high-income households.
Although the housing market's improvement may have increased the value of their assets, many fail to consider the amount still owed.
Additionally, the report notes that dual-earner households, where only one spouse has a retirement plan, often overlook the need to replace both spouses' earnings in retirement, contributing to their lack of worry.
The study also brings attention to the disparities in retirement concerns among racial and ethnic groups.
Black and Hispanic households are more likely to underestimate retirement risks due to gaps in financial literacy.
Recent research by the Wharton School of the University of Pennsylvania reveals that accumulating adequate retirement income remains a significant challenge for Black and Hispanic families in the US, exacerbated by the persisting racial wealth gap and housing market inequity.
Overall, the National Retirement Risk Index indicates that 47.1% of American households were at risk of not maintaining their standard of living in retirement in 2019.
The meaning of "at risk" varies based on income levels, with low-income households facing the threat of poverty, while high-income earners may struggle to sustain their current lifestyle in retirement.
In another finding, the report shows that 20% of low-income households are "too worried" about their retirement readiness.
Additionally, the study suggests that households with a single earner, homeownership, risk aversion, and self-perceived low financial knowledge are more likely to fall into the "too worried" category.
The report concludes that households' incorrect perceptions about retirement are driven by predictable factors and emphasizes the need for education regarding various sources of retirement income to address misconceptions and reduce the size of the "too worried" group.
