Over 40% Under- Or Over-prepared For Retirement

New Study Shows Poor Assessment of Retirement Readiness

Over 40% Under- Or Over-prepared For Retirement
April 17, 2017

Are you worried or confident in your retirement plans? How do you reach your decision? You may not be seeing the full picture.

A recent study conducted by the Center for Retirement Research at Boston College (CRRBC) found that more than 50% of Americans of working age are at risk of a lower standard of living during retirement and that many workers are not keeping up with their future retirement needs. However, the CRRBC study found one interesting fact: many Americans are poor at properly assessing their retirement readiness. A surprising number underestimate their position.

CRRBC evaluated people's skills in assessing their retirement readiness by comparing their answers on the Federal Reserve's Survey of Consumer Finances with CRRBC projections based on respondent's Social Security benefits, retirement funds, projected savings, and home equity. While 57% of survey respondents properly assessed their retirement preparation according to CRRBC, the remainder was split between false confidence and excessive worry.

Almost one in five (19%) were too confident in their ability to maintain their current lifestyle in retirement. People were more likely to fall into this category if they had higher incomes and participated in workplace accounts such as 401(k) programs.

That may seem counterintuitive, but remember that readiness relates to maintaining your current lifestyle during retirement — and if you have a higher income, you probably require more money to maintain that lifestyle. High balances in 401(k) accounts can also lead to a false sense of security if people do not run calculations to find out how long that income will last and whether they have enough in Social Security funds to supplement the 401(k). At upper income levels, Social Security will fill a lower percentage of financial needs.

On the other end of the spectrum, 23% are overestimating their retirement needs. The largest factor was home ownership, presumably because many homeowners do not see their home equity as part of their retirement assets. In that aspect, the survey may be skewed — if you plan to leave your home to your children and are not planning on using home equity for covering expenses, it is reasonable to leave that out of your planning — but at least you have the asset if you need it in case of emergency.

The study finds several lesser contributing factors to overestimation, such as being college-educated or being part of a married one-earner household. Of the lesser factors, the greatest contributor is being covered by a defined benefit plan (superior to a 401(k) in that it provides guaranteed lifetime income). Apparently, people do not understand either the total size of their pension or the value of it being a regular income stream.

With the free Retirement Planner available to run retirement financial scenarios, there is no reason for you to assess your readiness improperly. It's especially important to do so when you think you're ready but haven't proven it with an analysis. Once you realize that you are underfunded, you can do something about it.

April Lewis-Parks, Director of Education and Public Relations at Consolidated Credit, notes that financial tools allow people to roadmap their proper path to retirement. "There's all kinds of apps and calculators that will let you see...if I put my retirement fund up 1%, how much more money will I save over 30 years. Once people are aware of how little changes have a huge impact, then they will start to make those changes."

In essence, the key to being prepared is thinking in regular income instead of in lump sums. Large lifetime numbers inspire false confidence; smaller annual numbers cause apprehension. That's why it is important to analyze instead of guess.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle. If you don't like the answer you get, make adjustments now. Otherwise, you will be making adjustments during retirement, when it is too late.

Photo ©iStockphoto.com/SolStock

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Zanna | 04.17.17 @ 18:06
Calculating an exact amount for retirement can be difficult, but it's important to plan ahead, save what you can and know that starting early can make a huge difference in the amount you are able to save!
Carla | 04.17.17 @ 18:50
We have been adding more to our savings in the last few years. It is difficult to know just how much we will need when we reach retirement age so we put back any extra we have. It definitely pays to plan ahead and not be afraid to ask for help when making those plans. There are lots of resources out there!
Chrisitna | 04.18.17 @ 18:01
I definitely need to consult with an expert and reevaluate my retirement plans. The way things are now, I will definitely end up short.
$commenter.renderDisplayableName() | 11.29.20 @ 19:37