Data & Research March 1, 2016

More Flexibility Needed in Replacement Rate Planning Tools

The GAO’s analysis of literature about replacement rates found that calculating an appropriate replacement rate can be complex.
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Without the ability to adjust factors used in replacement rate planning tools, workers may over- or under-estimate how much they need to save for retirement, the Government Accountability Office (GAO) concludes in a new report.   

The GAO noted that researchers and financial industry professionals develop target replacement rates—the percentage of income to aim for in retirement—based on certain key factors, including spending, household characteristics, and pre-retirement earnings. GAO’s analysis of literature about replacement rates found that calculating an appropriate replacement rate can be complex.

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For example, there is debate over whether households that have raised children should target a lower replacement rate than households that have not. In addition, a worker’s pre-retirement earnings could be defined as earnings at the end of the worker’s career or as average earnings over the course of the career.

In addition, GAO found that household spending patterns varied by age, with mid-career households (those ages 45 to 49) spending more than older households. For example, according to 2013 survey data from the Bureau of Labor Statistics (BLS), mid-career households spent an estimated average of around $58,500, while young retiree households (those ages 65 to 69) spent about 20% less. GAO also found there was not a significant difference in average spending between mid-career and young retiree households in the lowest income quartile, compared to an approximately $20,000 difference for the highest income quartile. “These variations in spending patterns have implications for the resources households need to maintain their standard of living in retirement,” GAO said.

NEXT: The DOL’s own tool is limited

The GAO said the information and tools on replacement rates that the Department of Labor (DOL) provides may be too limited to help workers understand how to use such rates for retirement planning.  The DOL’s Employee Benefits Security Administration’s (EBSA’s) website provides information and tools to help American workers better plan for retirement, including a tool to help workers calculate their retirement income needs as a percentage of pre-retirement income.

While EBSA’s materials note that a target replacement rate can vary based on individual circumstances, they do not include specific examples of demographic groups that research indicates can result in higher or lower income replacement needs, or how much a replacement rate might need to be adjusted for those groups or for other individual circumstances. Without additional information, workers may not understand how to adjust target replacement rates when planning for retirement. Further, EBSA’s worksheet and online tool for calculating how much to save use a default replacement rate with no opportunity for a user to adjust the rate based on individual circumstances.

The GAO recommended that the DOL provide additional examples and guidance about using a replacement rate for estimating retirement savings needs in its planning tools, and modify the planning tools so the rate can be adjusted. According to the report, the DOL generally agreed with the GAO’s recommendations and plans to add information and provide options for adjusting replacement rates in its planning tools by June 2017.

Data & Research March 1, 2016

Women 80% More Likely Than Men to be Impoverished in Retirement

A new report finds that women have substantially less income in retirement than men.
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Women are far more likely than men to face financial hardship in retirement, according to a new report from the National Institute on Retirement Security (NIRS) titled, “Shortchanged in Retirement: Continuing Challenges to Women’s Financial Future.”

Women age 65 and older have an average income that is 25% lower than men’s. By age 80, women’s income is 44% lower. In addition, women face higher medical expenses and are more likely to need more expensive long-term care. Consequently, women are 80% more likely than men to be impoverished at age 65 or older, while women age 75 to 79 are three times more likely to fall below the poverty level than men.

As to what percentage of female and male senior citizens are impoverished, in the 65-69 age group, it is 6% of men and 8% of women, according to NIRS. In the 70-74 age group, it is 5% of men and 8% of women. In the 75-79 age group, it is 4% of men and 12% of women, and among those 80 and older, it is 6% of men and 11% of women.

“It is well documented that the nation faces a retirement savings crisis, but the pain is particularly severe for women because we need a bigger retirement nest egg than men, thanks to our longer life expectancy,” says Diane Oakley, NIRS executive director and co-author of the report. “This new data is troubling. It shows that a woman’s nest egg is substantially smaller than a man’s and that we’re not making real headway toward closing the retirement gender gap.”

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In 2010, men received an average retirement income of $17,856 from a pension, while women received $12,000, or 33% less. In 2014, according to Vanguard, the average amount that men had saved in a 401(k) was $36,875, compared to $24,446 for women, or 34% less. These gaps, NIRS says, are primarily due to the fact that in 2014, women earned an average of $0.79 for every dollar earned by a man.

NEXT: Women working longer to cover shortfall

The report also finds that the percentage of women between the ages of 55 and 64 in the workforce climbed from 53% in 2000 to 59% in 2015, which suggests, NIRS says, “women may be working longer in order to make up for lower retirement savings over their careers and to offset investment losses from the Great Recession.”

Women are also more likely than men to work part-time and to have shorter job tenure, making it more difficult for them to meet employers’ retirement plan eligibility requirements, according to NIRS.

Women who are widowed, divorced or over age 70 rely on Social Security benefits for a majority of their income, NIRS says. However, those who work in health care, education and public administration fields have higher incomes in retirement due to pension plans being prevalent in these industries.

NIRS recommends that women save more. The organization is also calling on policymakers to strengthen Social Security benefits for women and increase defined contribution plan eligibility for part-time workers.

The report is based on an analysis of the 2012 Survey of Income and Program Participation data from the United States Census. “Shortchanged in Retirement” can be downloaded here.

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