Wealthy people often overestimate their retirement preparedness, report finds

The analysis examines these households by income group. Thirty-two percent of high-income households say they are “not worried enough” about retirement risk, compared with 26% of low- and middle-income households.

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Experts say the disconnect between perception and reality can be dangerous. These households may be able to save more money during their working years, but they don't know they should.

“If you don't know you should save more, you won't cut back on spending — perhaps significantly — in retirement,” said Anki Chen, senior research economist and assistant director of savings research at the Boston College Center. “You will be exposed to more risks than you should.” .

Chen, who co-authored the report, added that older people may not be able to cope with some risks in retirement, such as rising medical costs.

There is an important caveat here. The meaning of “at risk” varies by income group. For example, at-risk low-income people may not be able to afford basic necessities in retirement, while wealthier households are less likely to fall into poverty, the analysis says.

The report said wealthy people risk facing “difficult adjustments that may require them to lower their expectations for retirement.”

The analysis leverages data from the Consumer Finance Survey, a household survey conducted every three years by the Federal Reserve Board. The latest version reflects his 2019 data.

In this study, income groups are defined by age and marital status. For example, a 2019 study defined couples ages 45 to 47 as low, middle, and high income if their median incomes were $50,000, $110,000, and $248,000, respectively. .

The Center for Retirement Research uses survey data to create the National Retirement Risk Index. The index models retirement readiness based on a variety of assets, including Social Security, pensions, home equity, and employer-sponsored retirement plans such as 401(k)s.

In 2019, 47% of American households were at risk of not being able to maintain their standard of living in retirement, according to the index. This number is down slightly compared to the years after the 2008 financial crisis, but up significantly compared to the beginning of this century.

Many factors are putting pressure on Americans' retirement readiness.

First, their longer lifespans mean that savings need to be made over a longer period of time.

According to the center's report, 19% of U.S. households correctly believe they are at risk of not reaching their retirement savings. But more worrying is the aforementioned 28% of households who are not worried enough, experts said.

“My biggest concern is people who think they're healthy but actually aren't,” said David Blanchett, head of retirement research at PGIM, the investment management arm of Prudential Financial. he said.

Chen said booming stock and housing markets may be giving an “illusion of wealth” to wealthy households who disproportionately own these financial assets.

For example, the median price of a home sold in the United States jumped from $223,000 at the beginning of 2010 to $327,000 by the end of 2019, according to federal data tracked by the Federal Reserve Bank of St. Louis. The S&P 500 has nearly tripled over this period.

Additionally, about 24% of wealthy households who underestimated their retirement risks had high housing debt relative to their home equity. That's three times more than his middle- and low-income earners, according to an analysis by the Center for Retirement Research.

Wealthy households also need to save more money to maintain their standard of living because Social Security accounts for a smaller portion of their annual income than other income groups.

Blanchett said saving money “dramatically improves” a household's retirement preparedness.

Blanchett said that apart from the obvious benefit of having more assets for retirement, saving more money today would effectively lower your standard of living. He added that as more people save, they spend less, and households are getting used to living on a tighter monthly budget, and lifestyle changes are likely to have an impact even in retirement.

Blanchett says the easiest way for households to get a rough idea of ​​their retirement preparedness is to use a few free online retirement calculators and enter all relevant financial information. Those who want a more in-depth study or personalized plan may consider consulting a financial planner, he said.