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Recession causes a rise in National Retirement Risk Index

Post a Comment January 25, 2010 – 5:12 pm | Post Link |  Print This Post |

51 percent now “at risk” for retirement

Advisors and clients need to take action now to help retirement goals become a reality.

A new update of the National Retirement Risk Index (NRRI) quantifies the impact of the recession of 2008 and 2009 on retirement readiness for households across the United States. The Center for Retirement Research at Boston College released an update of the NRRI that shows a seven percentage-point drop in the share of households that are positioned to maintain their current standard of living in retirement. At the same time, the NRRI underwriter, Nationwide Mutual Insurance Company, says its own research is showing signs that many who were actively preparing before the downturn have now disengaged from the process.

The updated National Retirement Risk Index includes assumptions accounting for the economic turmoil. It finds that 51 percent of Americans are not prepared to retire at age 65 compared to 44 percent in 2007. This is a conservative estimate, considering the latest update does not factor in the costs of health care or long-term care.

The update underscores how plummeting asset values and the continuing rise in Social Security’s full retirement age combine to negatively impact retirement readiness.

“Our research shows that the financial turmoil has driven up the share of households ‘at risk’ of being able to maintain their standard of living in retirement,” said Center Director Alicia H. Munnell. “We are clearly facing a retirement crisis – one that will continue to grow as younger workers age. To overcome today’s retirement challenges, people need help understanding financial topics so they can make reasonable financial choices throughout their lives.”

Consumers Are Disengaging

Along with the new NRRI data, Nationwide’s senior vice president of Customer Insights and Analytics, Paul Ballew, says the company’s own research is showing that a significant number of consumers who were actively planning for retirement before the recession are disengaging from the process. Those insights are confirmed by existing market conditions.

“We’re really looking at a one-two punch right now,” Ballew said. “We’re seeing the number of disengaged households increasing by more than a third. Many of these individuals felt the brunt of the economic downturn to a greater degree than others and have moderated their expectations toward retirement. It’s clear that many of these people who were planning before the downturn are now pulling away from the table. That’s exactly the opposite of what they should be doing.”

Ballew added, “The situation isn’t hopeless, but now more than ever Americans need to take a more active role in achieving retirement stability. The key is to keep working at it or to start preparing now if they haven’t already.”

Nationwide released some limited findings from recent proprietary market research that underscores the disengagement issue. The results include a comparison of recent responses to those provided by the same individuals in 2007 that would now be considered “newly disengaged.” Findings for this group include:

• A 60 percent drop in agreement with the statement that creating a retirement income source is important.
• A 25 percent drop in those who say they would seek advice before making investment decisions.

“The big question is if this increase in disengagement will be long lasting or not,” Ballew said. “For financial advisors, there is an opportunity to re-engage these households. Demonstrate an understanding of the frustration being felt. Be consistent by offering relevant solutions that help cynical clients preserve remaining assets and appropriately rebuild balance sheets.”

Two Updates Necessary

The first NRRI results were released in June 2006 and found that 43 percent of American households were ‘at risk’ of falling short of their pre-retirement standards of living. The Index was constructed using the Federal Reserve’s 2004 Survey of Consumer Finances, a triennial survey of U.S. households, which collects detailed information on households’ assets, liabilities and demographic characteristics.

“While the release of the Federal Reserve’s 2007 Survey of Consumer Finances seemed like a great opportunity to reassess Americans’ retirement preparedness, the survey reflects a world that no longer exists,” said Munnell. “Between the time of the survey’s interviews and the second quarter of 2009, equity holdings declined by $7 trillion and housing values dropped by $3 trillion. Thus, two updates are required – one to show what the NRRI looked like in 2007 and one to show what it looks like today.”

The result is a seven percentage-point increase in the number of Americans who are ‘at risk.’ The full report is available at the Center for Retirement Research at Boston College.

Making Retirement Goals a Reality

“Unfortunately, there are no easy answers,” said John Carter, president of Nationwide Financial Distributors, Inc. “The reality for many is that achieving their retirement goals will require multiple actions, such as saving and investing more, reducing debt and working longer. Many consumers will find it’s easier to achieve their retirement goals by enlisting the help of a qualified financial professional,” added Carter.

Nationwide developed RetirAbilityCheck^®, which is based on the NRRI data, to help consumers take the guesswork out of planning for retirement. This free, informative and interactive online experience provides consumers with a basic retirement readiness score to let them know approximately how financially on track they are for retirement, and simple tips on ways to improve their score, like enrolling in an employer-sponsored retirement program. It was developed to provide people with a solid starting point for planning for retirement.

“As many traditional sources of retirement income fade away, consumers need to find ways to balance their accumulation goals against the market, inflation and longevity risks they will face in retirement,” said Brad Davis, vice president of retirement income solutions for Nationwide Financial Services.

RetireSense is an innovative investment and draw-down strategy that helps investment professionals address their clients’ individual needs. It provides them with a clear road map for retirement income planning that helps identify which investments to consider harvesting for income, and when to do so. It also provides product mix and asset allocation suggestions and a customized client report that includes a probability of success score.

“As the latest update indicates, the retirement crisis is very real. Nationwide is proud of its role as exclusive underwriter of the National Retirement Risk Index, as it helps provide information and guidance to both financial professionals and consumers on retirement issues,” said Davis. “We also applaud Boston College for launching its Center for Financial Literacy (CFL) at a time when financial education has become more important than ever before.

The NRRI was developed by the Center for Retirement Research at Boston College and underwritten by a grant from Nationwide.
The Index projects how much income households are expected to have in retirement relative to their pre-retirement income. It then compares this ‘replacement rate’ to a target rate that would allow a household to maintain its pre-retirement standard of living. Households that fall more than 10 percent short of the target are considered ‘at risk.’

The Index produces conservative estimates by assuming that people work to age 65, annuitize all of their financial assets, and receive income from reverse mortgages on their homes. More realistic assumptions regarding earlier retirement and the reluctance of people to annuitize their assets or tap housing equity would put the percentage of workers ‘at risk’ higher.

Nationwide Research Methodology

Information about disengaged consumers in this release is based on a broader, proprietary study of 1,143 respondents surveyed in both 2007 and 2009 through an on-line survey. The results are based on a 95 percent confidence interval (margin of error + or – 5 percent). The research was conducted for Nationwide by Northstar in August and September 2009.
Nationwide, based in Columbus, Ohio, is one of the largest and strongest diversified insurance and financial services organizations in the U.S. and is rated A+ by A.M. Best. The company provides a full range of personalized insurance and financial services, including auto insurance, motorcycle, boat, home owners, life insurance, farm, commercial insurance, administrative services, annuities, mortgages, mutual funds, pensions, long-term savings plans and health and productivity services. For more information, visit nationwide.com.

RetireSense is a retirement income strategy developed by Nationwide Financial. The strategy is customized for the client through the use of the R-IncomeAnalyzer, a proprietary investment analysis tool that runs simulations, calculates the amount of money suggested for each investment and performs a statistical analysis that presents the likelihood of meeting specific income needs in retirement if certain types of suggested investments are made. This analysis is designed to enhance the investor’s evaluation and understanding of how the RetireSense strategy generates retirement income as well as the potential risks and returns associated with investment choices. The information generated by the Analyzer regarding the likelihood of various investment outcomes is hypothetical in nature, does not reflect actual investment results and is not a guarantee of future results.

John Carter and Brad Davis are registered representatives of Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation.

Nationwide, the Nationwide Framemark and On Your Side are service marks of Nationwide Mutual Insurance Company.