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© Employee Benefit Research Institute 2012 Will Boomer and Gen X Women be Able to Afford Retirement at Age 65? Evidence from the 2012 EBRI Retirement Security Projection Model® Jack VanDerhei Research Director Employee Benefit Research Institute February 7, 2012 [email protected] 1

Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?

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Page 1: Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?

© Employee Benefit Research Institute 2012

Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?Evidence from the 2012 EBRI Retirement Security Projection Model®

Jack VanDerhei

Research Director

Employee Benefit Research Institute

February 7, 2012

[email protected]

1

Page 2: Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?

© Employee Benefit Research Institute 2012

Key points from today’s presentation

• “At-risk” ratings have improved since 2003• Average of 4 percentage points for both single male and single female• However, single females have an at-risk rating approximately 80 percent higher than single

males• 26 percentage points

• Eligibility in qualified retirement plans matters a great deal• For single female Gen Xers, at risk rating drops from 74 percent to only 25 percent depending

on just future years of eligibility in a 401(k) plan• Impact still very significant after controlling for “income” quartile

• How much would it take for a single female to reduce retirement deficits to zero• Average of $104,000 to 133,000 (2010 dollars)

• Importance of nursing home costs• Some retirees will run “short” of funds within a relatively short period of time if

they retire at age 65• 41 percent of the lowest income quartile for ALL early boomers will run short within ten years

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Page 3: Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?

© Employee Benefit Research Institute 2012

Modeling Innovations in the EBRI Retirement Security Projection Model®

• Pension plan parameters coded from a time series of several hundred plans.

• 401(k) asset allocation and contribution behavior based on individual administrative recordso Annual linked records dating back to 1996 o 2010: More than 24 million employees in 60,000 plans.

• Stochastic modeling of nursing facility care and home based health care.

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© Employee Benefit Research Institute 2012

Retirement Income

• Limited to income produced by • Public and private retirement plans (including IRAs) • Social Security• Housing equity

• Assumes used as LSD when the retiree runs “short” of money

• Baseline scenario assumes retirement income commences at age 65 • See appendix for results of deferring retirement age

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© Employee Benefit Research Institute 2012

Retirement Expense Assumptions

• Decomposed total expenditures for retirees into:o Those that are deterministic:

Food, apparel and services, transportation, entertainment, reading and education, housing, and basic health expenditures.

o Those that are stochastic: Home health care and nursing home care.

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early boomers single

male

early boomers single female

late boomers single

male

late boomers single female

gen xers

single male

gen xers

single female

2003 lsd

0.38607 0.65198 0.35116 0.62173 0.38199 0.64399

2012 lsd

0.35662 0.61785 0.3216 0.59808 0.32094 0.56863

5%

15%

25%

35%

45%

55%

65%

Figure 1: Improvement of at-risk* ratings from

2003-2012 by age cohort and gender

Lowest 2.00 3.00 Highest

Volun-tary en-rollment

1.16945 2.36987 3.71124 6.03973

Auto-matic en-rollment

7.6753 8.01349 8.34285 8.52674

0.50

1.50

2.50

3.50

4.50

5.50

6.50

7.50

8.50

Employees Currently Ages 25–29: Median 401(k) Accumulation Multi-

ples for 401(k) "Accumulations" as a Function of Salary Quartile by Type of Plan (Assumes 31-40 Years of El-

igibility)

Post-2009 401(k)

"Accumulations" as a

Multiple of Final Earnings

*Definition of terms are provided on the last page of the slide set.Sources: EBRI Retirement Security Projection Model,® Version 120201 and Jack VanDerhei, (April 2010). “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors”. EBRI Issue Brief.

Page 7: Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?

© Employee Benefit Research Institute 2012

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3 0 3 1-9 3 10-19 3 20 or more

single male 0.46816 0.32275 0.22168 0.12984

single female 0.74221 0.53663 0.40225 0.25003

5%

15%

25%

35%

45%

55%

65%

75%

Figure 2: Impact of future years of 401(k) eligibility on 2012 at-risk* ratings for Gen Xers by gender

*Definition of terms are provided on the last page of the slide set.Source: EBRI Retirement Security Projection Model,® Version 120201. For additional detail see: Jack VanDerhei and Craig Copeland (July 2010). The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects. EBRI Issue Brief.

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© Employee Benefit Research Institute 2012

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lowest "in-

come" quartile

0

lowest "in-

come" quartile

1-9

lowest "in-

come" quartile 10-19

lowest "in-

come" quartile 20 or more

2 0 2 1-9 2 10-19 2 20 or more

3 0 3 1-9 3 10-19 3 20 or more

highest "in-

come" quartile

0

highest "in-

come" quartile

1-9

highest "in-

come" quartile 10-19

highest "in-

come" quartile 20 or more

sin-gle male

0.68705

0.53714

0.50292

0.51924

0.47855

0.41188

0.30259

0.24004

0.34793

0.30406

0.14513

0.09187

0.21824

0.17768

0.06701

0.03076

sin-gle fe-male

0.88246

0.78711

0.74882

0.6609 0.62508

0.5818 0.43149

0.33366

0.46444

0.41898

0.24093

0.16221

0.34786

0.29058

0.15766

0.08751

5%

15%

25%

35%

45%

55%

65%

75%

85%

95%

Figure 3: Impact of future years of 401(k) eligibility and "income" quartile on at-risk* ratings for Gen Xers by gen-

der

*Definition of terms are provided on the last page of the slide set.Source: EBRI Retirement Security Projection Model,® Version 120201. For additional detail see: Jack VanDerhei and Craig Copeland (July 2010). The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects. EBRI Issue Brief.

Page 9: Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?

© Employee Benefit Research Institute 2012

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early boomers late boomers gen xers

single male 33703.98 33419.97 41528.73

single female 64749.4 67056.67 75826.55

$5,000

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

Figure 4: 2012 unconditional Retirement Savings Shortfall* numbers by age cohort and gender

*Definition of terms are provided on the last page of the slide set.Source: EBRI Retirement Security Projection Model® versions 100920f1 and 100922f1. For additional detail, see: Jack VanDerhei, Retirement Savings Shortfalls for Today’s Workers, October 2010, Vol. 31, No. 10, EBRI Notes

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© Employee Benefit Research Institute 2012

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early boomers late boomers gen xers

single male 94508.95 103917.95 129397.6

single female 104798.63 112120.4 133349.07

$10,000

$30,000

$50,000

$70,000

$90,000

$110,000

$130,000

$150,000

Figure 5: 2012 conditional Retirement Savings Shortfall* numbers by age cohort and gender

*Definition of terms are provided on the last page of the slide set.Source: EBRI Retirement Security Projection Model® versions 100920f1 and 100922f1. For additional detail, see: Jack VanDerhei, Retirement Savings Shortfalls for Today’s Workers, October 2010, Vol. 31, No. 10, EBRI Notes

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© Employee Benefit Research Institute 2012

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Single Female Early Boomers

Single Female Late Boomers

Single Female Gen Xers

Single Male Early Boomers

Single Male Late Boomers

Single Male Gen Xers

without sto-chastic health

24110.21 19253.65 19795.5 9889.96 5374.39 2876.27

with stochas-tic health

63437.61 63509.81 75488.23 36253.51 35895.81 43289.92

$5,000

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

Figure 6: Average 2010 Retirement Savings Shortfalls,* by Gender, Marital Status and Age Cohort: With and Without Stochastic Health

*Definition of terms are provided on the last page of the slide set.Source: EBRI Retirement Security Projection Model® versions 100920f1 and 100922f1. For additional detail, see: Jack VanDerhei, Retirement Savings Shortfalls for Today’s Workers, October 2010, Vol. 31, No. 10, EBRI Notes

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0 5 10 15 20 25 30 35 40 450%

10%

20%

30%

40%

50%

60%

70%

Figure 7: 2010 RSPM Estimate of Years in Retirement Before Early Boomers Run Out of Money,* by Preretirement Income Quartile

Lowest 23Highest

Years in Retirement (Assuming retirement at age 65)

Cum

ulat

ive

Pro

babi

lity

.

Income Quartile

*Definition of terms are provided on the last page of the slide set.Source: Jack VanDerhei and Craig Copeland (July 2010). The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects. EBRI Issue Brief.

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Definition of terms

Figures 1- 3 : An individual is considered to be at‐risk in this version of the model if their aggregate resources in retirement are not sufficient to meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) and some health insurance and out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid). The resources in retirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities from defined benefit plans (unless the lump‐sum distribution scenario is chosen), and net housing equity ( in the form of a lump‐sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates, standard‐of‐living and other thresholds.

Figures 4-6: The Retirement Savings Shortfalls (RSS) are determined as a present value of retirement deficits at age 65.

Figures 7- 11: An individual is considered to be at‐risk in this version of the model if their aggregate resources in retirement are not sufficient to meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income) and some health insurance and out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid). The resources in retirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities from defined benefit plans (unless the lump‐sum distribution scenario is chosen). Net housing equity is not considered in this run. This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates, standard‐of‐living and other thresholds.

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© Employee Benefit Research Institute 2012

Appendices

• Brief chronology of RSPM • Impact of reducing Social Security benefits by 24 percent starting in

2037• Impact of deferring retirement age past 65• Impact of lowering the stochastic rate of return assumptions• Impact of the crisis in the financial and real estate markets in 2008/9

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© Employee Benefit Research Institute 2012

Appendix: Brief Chronology of the EBRI/ERF Retirement Security Projection Model®

• 2001, Oregono Simulated retirement wealth vs. ad hoc thresholds for

retirement expenses

• 2002, Kansas and Massachusetts o Full stochastic retiree model: Investment and

Longevity risk, Nursing home and home health care costs

o Net housing equity

• 2003, National modelo Expanded to full national sample

• 2004, Senate Aging testimonyo Impact of everyone saving another 5 percent of

compensation

• 2004, EBRI Policy forumo Impact of annuitizing defined contribution/IRA

balances

• 2006, EBRI Issue Briefo Evaluation of defined benefit freezes on participants

• 2006, EBRI Issue Brief o Converted into a streamlined individual version for

the ballpark estimate Monte Carlo

• 2008, EBRI policy forumo Impact of converting 401(k) plans to automatic

enrollment

• 2009, Pension Research Councilo Winners/losers analysis of defined benefit

freezes and enhanced defined contribution employer contributions provided as a quid pro quo

• 2010, EBRI Issue Brief (April)o Impact of modification of employer

contributions when they convert to automatic enrollment for 401(k) plans

o 2010, EBRI Issue Brief (July)o Updated model to 2010, included automatic

enrollment for 401(k) planso 2010, EBRI Notes (Sept and Oct)

o Analyzes how eligibility for participation in a DC plan impacts retirement income adequacy

o Computes Retirement Savings Shortfalls for Boomers and Gen Xers

o 2010, Senate HELP testimonyo Analyzes the relative importance of

employer-provided retirement benefits and Social Security

Page 16: Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?

© Employee Benefit Research Institute 2012

Appendix (continued)

o 2011, EBRI Issue Brief (February)o Analyzes the impact of the 2008/9 crisis

in the financial and real estate markets on retirement income adequacy

o 2011, EBRI policy forumo Analyzes impact of deferring retirement

age

o 2011, July Notes articleo Analyzes the impact of the 20/20 limit

recommended by the National Commission on Fiscal Responsibility and Reform

o 2011, August Notes articleo Analyzes value of defined benefit plans

o 2011, Senate Finance Hearingo Analyzes the impact of modifying tax

incentives for defined contribution plans

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65 67 69 71 73 75 77 79 81 83 850%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Figure 8: Percentage of Baby boom and Gen X Households Simulated to Have Adequate* Retirement Income for at Least 50 Percent of Simulated Life Paths After Retirement Age by

Pre-Retirement Income Quartiles

lowest

2

3

highest

Retirement Age

Per

cen

tag

e o

f H

ou

seh

old

s

.

*Definition of terms are provided on the last page of the slide set.Source: EBRI Retirement Security Projection Model® versions110410i. For more detail see: Jack VanDerhei and Craig Copeland, (June 2011). The Impact of Deferring Retirement Age on Retirement Income Adequacy. EBRI Issue Brief.

Page 18: Will Boomer and Gen X Women be Able to Afford Retirement at Age 65?

© Employee Benefit Research Institute 2012

Figure 9: 2010 RSPM: Impact of reducing Social Security benefits by 24 percent starting in 2037

early boomers late boomers gen xers0%

10%

20%

30%

40%

50%

60%

Percentage of population “at risk” for inadequate re-tirement income, by age cohort

Baseline

Reduced Social Security benefits

*Definition of terms are provided on the last page of the slide set.Source: Jack VanDerhei and Craig Copeland (July 2010). The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects. EBRI Issue Brief.

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© Employee Benefit Research Institute 2012

Figure 10: 2010 RSPM: Impact of lowering the stochastic rate of return assumptions from a mean of 8.9% equity and 6.3% fixed income, to 4.45% equity and 3.8% fixed income

early boomers late boomers gen xers0%

10%

20%

30%

40%

50%

60%

Percentage of population “at risk” for inadequate re-tirement income, by age cohort

Baselinelower ror

*Definition of terms are provided on the last page of the slide set.Source: Jack VanDerhei and Craig Copeland (July 2010). The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects. EBRI Issue Brief.

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Early Boomers Late Boomers Gen Xers0%

5%

10%

15%

20%

25%

EBRI RRR Baseline 2010 EBRI RRR With 2008 Values

Figure 11: Baseline 2010 EBRI Retirement Readiness RatingTM (RRR) vs. Baseline With 1/1/08 Market Values and Home Equity

[This analysis is limited to households that had positive values for all of the followingon 1/1/08: Defined contribution plan balance, IRA balance and housing equity]

Percentage of population “at risk” for inadequate retirement income, by age cohort.

Source: VanDerhei, Jack, A Post-Crisis Assessment of Retirement Income Adequacy for Baby Boomers and Gen Xers, February 2011, EBRI Issue Brief #354