Pre-Retirees Face Major Retirement Income Gap

Although retirement readiness has improved in the past year among those ages 55 to 64, workers nearest retirement face much higher hurdles than their younger counterparts, according to an second quarter analysis from BlackRock.

Analyzing data from the Employee Benefit Research Institute (EBRI), a Washington, D.C., organization that tracks U.S. retirement savings data, individuals in their 60s face a bigger gap in replacing their pre-retirement income through the use of savings and investments than those in their 50s.

Those ages 55 to 64 are on track to replace as much as two-thirds of their on-the-job earnings each year in retirement with savings from various assets, including 401(k) plans, individual retirement accounts and Social Security, according to BlackRock’s analysis.

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The median 55-year-old is already on track to replace 69% of his pre-retirement income through a combination of his own investments and Social Security benefits,  BlackRock notes.

Financial advisors typically recommend that pre-retirees save enough to replace about 80% of their pre-retirement income, according to Aon Hewitt’s 2008 Replacement Ratio Study, which finds that an 80% income replacement rate is needed for single people with $50,000 in pre-retirement income who retire at age 65 to maintain their standard of living.

In comparison, the outlook is more daunting for median 64-year-olds still in the workforce, who are prepared to replace just 59% of pre-retirement income.

This group has the biggest shortfall to overcome, meaning they face tough trade-offs in terms of retirement lifestyle or working past age 65, writes BlackRock Managing Director Chip Castille, who also heads BlackRock’s U.S. Retirement Group.

“However, many workers with ample savings retire before age 64,” Castille writes. “Those still in the workforce already may have reckoned with inadequate retirement savings, contributing to their decision to stay on the job.”

Also coming into play is that the cost of future lifetime income increased in the past 12 months for investors ages 55, 60 and 64, as estimated by the BlackRock CoRI Retirement Indexes.

For someone aged 55, for example, every $1 of lifetime retirement income was estimated to cost $14.09 as of June 30, a 7.15% increase from what that income would have cost an individual the same age a year ago.

But although workers’ investments may have increased enough in median value in the past year to put them in a better position to increase their level of replacement income after they have stopped working, the youngest pre-retirees should face the smallest income gap, BlackRock notes.

“For workers nearest retirement age, the gap is estimated to be much larger,” writes Castille. “Median 60-year-olds are on track to replace just 64% of their median workplace income—and 64-year-olds may be able to replace only 59%. Many pre-retirees are expected to work longer or attempt to cut their living expenses.”

View the BlackRock analysis.

Written by Jason Oliva

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