Going Broke in Year One A Real Possibility, EBRI Says

A new EBRI report, “Short Falls: Who’s Most Likely to Come up Short in Retirement, and When?,” suggests many low-income workers could face income hardships starting in the very first year of retirement. But EBRI also finds that workers in all income brackets—including the highest—may run short on income at some point during their retirement if aggressive steps are not taken to secure lifetime income streams.

EBRI researchers find just 5% or less of those in the second, third and highest income quartiles are likely to run short of money in the first year of retirement, but the figure jumps to 43% for the lowest income quartile. By the 10th year in retirement (assuming retirement at age 65), nearly three in four (72%) retirees in the lowest income quartile households are likely to face income shortfalls under current savings and investing trends.

By comparison, fewer than one in five of those in the second income quartile are likely to run short of money in the first 10 years of retirement, EBRI says. Seven percent of those in the third income quartile and just 2% of those in the highest quartile are simulated to run short of money within a decade of the retirement date. When nursing home and home health-care expenses are factored in, the number of households in the lowest income quartile projected to run short of money within 20 years of retirement is considerably larger than those in the other three quartiles combined, EBRI says.

“As the results across multiple scenarios and assumptions show, those in the lowest income group are the most vulnerable,” explains Jack VanDerhei, EBRI research director and author of the report. “They are by far the most likely to run short of money in retirement, and to do so fairly quickly.”

Extending the results to a maximum of 35 years in retirement (with the retiree reaching age 100 following retirement at age 65), 83% of the lowest income quartile households are likely to run short of money and almost half (47%) of those in the second income quartile would face a similar situation, EBRI says. Only 28% of those in the third income quartile and 13% of those in the highest income quartile are simulated to run short of money eventually.

The EBRI analysis presents outcomes under a number of different scenarios and finds that the number of years it will take before Baby Boomers and members of Generation X run short of money varies tremendously by their preretirement income quartile. Other critical factors, EBRI says, include the percentage of average deterministic costs paid by the retired individual, and whether or not nursing home and home health care expenses are taken into account.

However, even when 100% of average deterministic costs are paid by the household and nursing home and home health care expenses are included, only the households in the lowest income quartile eventually end up with more than 50% of the households running short of money, EBRI explains. The lesson is that income levels and savings rates can be far more influential to retirement readiness than investment decisions, EBRI says.

The full income analysis is published in the June 2014 EBRI Notes and is available online at www.ebri.org.