Delaying Retirement no Guarantee of Affording Retirement

Research from the nonpartisan Employee Benefit Research Institute (EBRI) found that even if a worker delays his or her retirement age into their 80s, there is still a chance the household will be “at risk” of running short of money in retirement. However, the chance of success for retirement adequacy improves significantly as individuals reach their late 70s and early 80s.

EBRI says a major factor that determines a person’s ability to meet their basic expenses and uninsured health care costs in retirement is whether they continue to participate in a defined contribution retirement plan (such as a 401(k)) after the age of 65. The increase in the percentage of households that are predicted to have adequate retirement income as a result of defined contribution participation varies by several factors (such as retirement age and pre-retirement income level), but this factor makes at least a 10 percentage point difference in the majority of the retirement age/income combinations.  

The analysis is based on data from EBRI’s Retirement Security Projection Model (RSPM). Developed in 2003, RSPM provides an assessment of national retirement income prospects. The 2011 version of RSPM adds a new feature that allows households to defer retirement age past age 65 in an attempt to determine whether retirement age deferral is indeed sufficiently valuable to mitigate retirement income adequacy problems for most households (assuming the worker is physically able to continue working and that there continues to be a suitable demand for his or her skills).  

According to the model, for those in the lowest income group, only 29.6% of households would have sufficient resources to avoid running short of money in retirement 50% of the time; however, this increases to 34.6% if retirement is deferred until age 67 and 46.5% if retirement is deferred until age 69.  

The incremental increase in the percentage of households in the lowest pre-retirement income quartile having at least a 50% probability of success levels off for several years (in large part due to the elimination of the delayed retirement credits under Social Security) but then picks up again after age 75. Approximately one-half (49.1 percent) of the lowest pre-retirement income quartile households retiring at age 75 would have at least a 50% probability of success, but that increases to 61.7% at age 80, and 90.2% at age 84.  

For the second pre-retirement income quartile, less than a quarter (23.5%) of households would have a 70% probability of adequate income if they retired at age 65. This increases to 36.5% if they keep working to age 69.  

For those households in the next-to-highest income group, almost half (49.1%) would have a 70% probability of adequate income if they retired at age 65. This increases to 60.5% if they keep working to age 69.  

Three-quarters (75.9%) of households in the highest preretirement income quartile are likely to have adequate income for retirement if they retired at age 65. This increases to 81.1% if they keep working to age 69.  

The full report appears in the June 2011 EBRI Issue Brief, “The Impact of Deferring Retirement Age on Retirement Income Adequacy,” at http://www.ebri.org.