Many Americans are deceiving themselves when it comes to their readiness to retire — especially the wealthier ones.
About a third (34%) of American households say they are at risk of not being able to replace income from work in retirement. But an index that measures the share of working-age households at risk predicts a much larger number – nearly half (47%) are at risk, according to one report. new summary published by the Center for Retirement Studies at Boston University.
Households with higher incomes tend to be more optimistic than those with lower incomes.
The disconnect between belief and reality means that many households with too little savings find it difficult to navigate and find themselves with a lower standard of living in retirement, while those who are overly anxious have It is possible to lose too much money earned now for the future.
Anqi Chen, one of the summary’s co-authors and a senior economist at the Center for Retirement Studies, told Yahoo Finance: “We found that about 28% of people are so-called ‘no’. worry enough’. “They think they’re doing well, but our model says they’re at risk of falling short.”
The index was calculated by researchers based on the most recent three-year Federal Reserve Survey of Consumer Finances data provided by 6,500 American households in 2019. The index measures the percentage of people. percent of working-age households at risk of not being financially prepared for retirement.
This is where it gets a little messy. The Index’s income assumptions suggest that people work until age 65, accumulate all of their financial assets, and tap their home equity with a reverse mortgage on their home. Surname.
The truth is that most people don’t have the ability to do all of that, so the eventual lagging percentage could be much higher.
It’s worth noting that the meaning of the word “at risk” varies according to income, according to the researchers. At-risk households with very low incomes may find it difficult to cover basic necessities. In contrast, high-income households are unlikely to go bankrupt. They do, however, face the possibility of a significantly reduced lifestyle – especially since so many are at risk of getting the impression that they are not.
‘Illusion of wealth’
Overall, 41% of upper-middle-income households – which vary by age and marital status – are at risk of a reduced standard of living in retirement, while only 17% said they were concerned. quiet, according to the report. That’s a difference of 24 percentage points.
But the summary found 45% of middle-income households were in danger compared with 33% who said they were in danger, a difference of 12 points. For low-income households, 56% are at risk compared with 50% who say they are at risk — a difference of 6 percentage points.
“Having an illusion of wealth plays a role in why they are more likely to not worry enough,” says Chen.
According to the report, high-income households who already have a home are more likely to fall into the category of not worrying enough.
“They may think they are living well because they have a home and house prices seem to be going up very quickly, but they forget that they still owe a lot of money to buy a house,” Chen said. “And so they think they’re actually financially well off, even though they may not be.”
Another group are people who “have the illusion of wealth if you have $100,000 in your 401(k), that seems like a lot of money, but if you turn that money into a a steady income in retirement is about $617 per month in retirement income, which isn’t really a lot of money,” she added.
Couples with two careers can also fall into the category of overconfidence. They may fall into the misconception that they’re dandy when they have enough money for their retirement years, but are likely to fall short of their expectations.
“You might find that if you have two earners, you think you’re doing pretty well with those two incomes, but if only one of them is saving for retirement, it’s going to be very difficult to maintain. maintain that dual income. spend in retirement if only one of them is saving,” said Chen.
Interestingly, although those perceptions are far from reality, “nearly three-fifths of survey respondents have a good feeling about their financial situation,” Chen said.
“It’s the people who correctly assess their situation. That’s a mix of people who are at risk and they think they’re at risk as well as people who aren’t at risk and correctly say they’re not at risk. ro.”
For instance, 40% of American households are in good shape when it comes to their future and know it, according to the report, while 20% are in trouble and know it. In contrast, 15% were “too worried,” while the researchers predicted they would be fine.
“The way we look at risk is whether you can maintain your pre-retirement standard of living,” says Chen. “Households that ‘don’t worry enough’ about their retirement income may not be saving enough right now or are less likely to change their retirement plans. ‘too worried’ households may unnecessarily sacrifice pre-retirement living standards.”
Kerry Hannon is a Senior Correspondent and Columnist at Yahoo Finance. She’s a workplace futurist, a career and retirement strategist, and the author of 14 books, including “Take Control at 50+: How to Succeed in Your Career.” new job” and “Never too old to get rich.” Follow her on Twitter @kerryhannon.