If you are on your own, you’re probably not saving enough for retirement. That’s the conclusion of a new study published this week by the National Bureau of Economic Research on retirement readiness from two researchers at the RAND Corporation, a non-profit research firm.
In Economic Preparation for Retirement, Michael Hurd and Susann Rohwedder found that 51% of the single people in the group of 66-to-69 year olds they looked at had a strong possibility of running into serious financial troubles in retirement. By comparison, only 23% of the couples in the study were at risk of outliving their savings. The group with the most retirement risk? Women who had not completed a high school education. Of that group, 73% are likely to run out of cash before they die.
Surprisingly, though, the study found that Americans are, on average, better prepared for retirement than many believe. The study looked at the finances of early baby boomers, who have recently retired or are near retirement. Hurd and Rohwedder found that on average 71% of the people they looked at had a very good chance of having enough money to fund their retirement. For college graduates, the number was an even better 89%.
Other studies have painted the U.S. retirement landscape in much worse light. For instance, the oft-quoted National Retirement Risk Index, which is put together by the Center for Retirement Research at Boston College, puts the percentage of working-age households who have not saved enough for their post-employment life at 51%.
Laurence Kotlikoff of Boston University has long argued that retirement calculators at brokerage firms and mutual fund websites routinely overstate how much money you need to save for retirement. That’s because most of those calculators expect your spending to remain constant from the day you stop working through your last dying breath. The same is true for Boston College’s retirement index. Hurd and Rohwedder, by contrast, use a spending curve model: They assume that most people spend about 90% of their pre-retirement income at age 70. But that spending drops to about 60% by age 80, and is below 50% by age 85. So, yes, we might end up being better off in retirement than some researchers suggest, but that’s not because we are in better financial shape than we think — it’s just that we will end up spending less.
Another factor that made Hurd and Rohwedder’s study more optimistic about retirement savings than others was perhaps a little more morbid. Hurd and Rohwedder classified a number of low-income households, despite their meager retirement savings, as adequately prepared for retirement because they assumed that poorer people are more likely to die at a younger age than rich people.
While the study found differences in retirement preparedness among people with different levels of educational attainment, the big differnce showed up when the researchers looked at marital status. For instance, while just 27% of unmarried women without a high school degree were likely to have enough money saved for retirement, 68% of married women with the same educational background had, along with their partners, enough savings for their post-working years.
The finding that couples are more likely to have enough savings is perhaps surprising because couples have a high chance of at least one member surviving into their 90s. The study didn’t offer any conclusions as to why couples are better savers than individuals.
Another interesting finding of the study, especially in light of the current debt debate, was that Social Security is perhaps more important as a source of retirement income than many think. The study found that a 30% reduction in Social Security benefits would increase the number of single people not prepared for retirement to 61%. For couples, a cut in Social Security would be less devastating, but still significant, bringing the number who are unprepared for their golden years to 31%.