Many Americans, especially the wealthy, deceive themselves when it comes to preparing for retirement.
About one-third (34%) of American households say they are at risk of not being able to replace their labor income in retirement. But indicators that measure the proportion of working-age households at risk predict that far more households are at risk, according to a new summary published by the Boston University Center for Retirement Research. Almost half (47%) say they are at risk.
High-income households were more likely to be overly optimistic than low-income households.
The disconnect between beliefs and reality means that many households that save too little are less likely to get back on track and have a lower standard of living in retirement, while households that worry too much are less likely to get back on track and have a lower standard of living in retirement, while those who worry too much are less likely to get back on track and have a lower standard of living in retirement. That means you could lose too much for the future.
“We found that about 28% of people are so-called 'not worried enough,'” Anqi Chen, one of the report's co-authors and a senior research economist at the Center for Retirement Research, told Yahoo Finance. . “They think they're doing well, but our model says they're at risk of not doing well.”
The index was calculated by researchers based on the Federal Reserve's latest triennial consumer finance survey data provided by 6,500 American households in 2019. The index measures the percentage of working-age households that are at risk of not being financially prepared for retirement.
This is where things get a little tricky. The index's income assumptions assume that people work until age 65, retire all their financial assets into a pension, and leverage their home equity with reverse mortgages.
The truth is, most people are unlikely to do all of these things, so the percentage of people who end up falling behind can be much higher.
It's also worth noting that the meaning of “at risk” varies by income, according to the researchers. At-risk households with very low incomes may not be able to afford basic necessities. In contrast, households with high incomes at risk are unlikely to go bankrupt. But they face the possibility of a drastic curtailment of their lifestyles. Especially since many people at risk believe they are not.
“Illusion of wealth”
Overall, the report found that 41% of households with higher median incomes (varying by age and marital status) were at risk of lower living standards in retirement, and 41% of households said they were concerned. It was only 17%. This is a difference of 24 percentage points for him.
But the brief found that 45% of middle-income households were at risk compared to 33% who said they were at risk, a 12-point difference. . Among low-income households, 50% say they are at risk compared to 56%, a difference of 6 percentage points.
“Illusions of wealth play a role in why they are likely not worried enough,” Chen said.
High-income households that own a home are much more likely to fall into the not-enough-worried group, the report said.
“They may think they're doing well because they own a home and house prices seem to be rising rapidly, but they still have a lot of debt on their home. “We forget that we have a lot of people,” Chen said. “So they think they are really well off financially, even though they are actually not.”
Another group says, “$100,000 in a 401(k) may seem like a lot of money, but when you translate that into a steady source of income in retirement, it's only about $617 a month.'' “People who have this illusion of wealth.” “It’s actually not a huge amount of money for retirement,” she added.
Couples with dual incomes can also fall into the overconfident category. They may fall into the misconception that they are dandy in terms of having enough money for retirement, but they are likely not to live up to their expectations.
“We find that if there are two earners, they seem to be doing pretty well on those two incomes, but if only one of them is saving for retirement, then keeping that dual income “If only one of them saves, their retirement expenses will increase,” Chen said.
“Intuition”
What is interesting is that although some people have perceptions that are disconnected from reality, “nearly three out of five survey participants have an intuitive understanding of their own financial situation,'' Chen said. Ta.
“They are people who are assessing their situation correctly. It's about people who are at risk and who they think are at risk, and people who are not at risk but who they think are at risk. are a combination of people who correctly claim they are not at risk.”
For example, the report found that 40% of American households are in good shape and know about their future, while 20% are in trouble and know it. Conversely, 15% said they were “too worried,” but researchers expect them to be okay.
“The way we look at risk is whether you can maintain the same standard of living after you retire as you did before you retired,” Chen said. “Households that are 'not worried enough' about their retirement income may not be saving enough currently or are the least likely to change their retirement plans. “Households that are in a state of poverty may unnecessarily sacrifice their pre-retirement standard of living.”
Kelly Hannon is a senior reporter and columnist at Yahoo Finance. She is a workplace futurist, career and retirement strategist, and author of 14 of her books, including In Control at 50+: How to Succeed in The New Work of Work and Never Too Old To Get Rich. He is also the author of the book. Follow her on Twitter @Kellyhannon.
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