Two recent studies by the Employee Benefit Research Institute show how baby boomers and Gen Xers are faring in their retirement readiness (much better thanks to the housing and financial markets), while another shows that those already in retirement are taking “small” withdrawals from their IRAs.
While gains over the past year in the financial and housing markets have boosted Baby Boomers’ and Gen Xers’ retirement readiness, staying on track in the coming years depends on age, income and having access to a 401(k) plan, EBRI found.
The Washington-based EBRI also found that withdrawals from IRAs tend to be small and closely follow the rates dictated by the federal required minimum distribution (RMD) rules that apply to individuals age 70 1/2 or older.
Examining patterns drawn from the proprietary EBRI IRA Database, the median withdrawal rate for those taking a distribution was found to be 7.4 percent for the combination of traditional and Roth IRAs and 6 percent when considering traditional IRAs only. Just over 16 percent of traditional and Roth IRA accounts combined had a withdrawal in 2011 (the latest data available), including 20.5 percent of traditional IRA accounts.
For its report on retirement readiness, EBRI used its proprietary Retirement Security Projection Model and found that overall retirement income adequacy for Baby Boomers and Generation X households improved last year, though factors like age, income, and especially access to an employment-based 401(k)-type retirement plan can produce “significant individual differences.”
Employers are holding back on both the amount and the timing of 401(k) matching funds and dragging out vesting schedules.
EBRI found that last year’s gains in the financial markets and housing values mean that fewer of these baby boomer and Gen X households are likely to run short of money in retirement.
In looking at boomer and Gen X households' retirement income readiness, EBRI’s simulation model takes into account a combination of deterministic expenses from the Bureau of Labor Statistics' Consumer Expenditure Survey (as a function of age and income) as well as health insurance and out-of-pocket, health-related expenses, plus stochastic expenses from nursing-home and home-health care (at least until the point such expenses are covered by Medicaid).
Ratings are expressed as a percentage of "life paths" for a particular group that are projected not to run short of money.
EBRI found that the overall gains from a year ago are modest when aggregated by age cohort (between 0.5 and 1.6 percentage points); however, the ratings can vary widely, based on various individual factors.
For instance, the study found that annuities and long-term care insurance could alleviate much of the risk of going broke in retirement. The annuitization of a portion of the defined contribution and IRA balances “may substantially increase the probability of not running short of money in retirement,” EBRI said. “Moreover, a well-functioning market in long-term care insurance would appear to provide an extremely useful technique to help control the volatility from the stochastic, long-term care risk, especially for those in the middle-income quartiles.”
Future Social Security benefits “make a huge difference for the retirement income adequacy of some households, especially Gen Xers in the lowest-income quartile,” the study found. “If Social Security benefits are subject to proportionate decreases beginning in 2033 (when the Social Security Trust Fund is projected to run short of money), the RRR values for those households will drop by more than 50 percent: from 20.9 percent to 10.3 percent.”
Jack VanDerhei, EBRI research director and author of the report, said that “it would appear that while retirement income adequacy depends to a large degree on the household’s relative wage level and future years of eligibility in a defined contribution plan, a great deal of the variability in these values could be mitigated by appropriate risk-management techniques at or near retirement age.”
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