How well do you think you’re prepared for retirement? Do you think you have enough saved, or not enough? A recent study from the Center for Retirement Research at Boston College looked at households’ self-assessed retirement preparedness, as retirement preparedness, or the lack thereof, can influence saving habits.
While the study found that most households overall have a good sense of whether they are on track for retirement, some are “too worried” or “not worried enough."
The study analyzed the National Retirement Risk Index (NRRI), which is based on the Federal Reserve’s Survey of Consumer Finances (SCF), a triennial survey of a nationally representative sample of U.S. households. Among other things, the SCF asks each household to rate the adequacy of its anticipated retirement income.
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Not worried enough
The study shows that higher earning households are more likely to be overconfident in their retirement savings. In fact, 32% of high income households were found to be “not worried enough” about how much they’ve saved for retirement. On the other hand, only 26% of low and middle income earners weren’t concerned enough about how much they have in retirement savings.
Here are the major reasons why respondents were “not worried enough," according to the Center for Retirement Research at Boston College.
Housing debt-to-asset ratio: According to the study, "as the housing market improved, households may have been comforted by the rising value of their asset, without considering how much they still owed." This is especially true for higher earning households who typically have more expensive houses. 23.8% of high income households were affected by this factor, compared to only 7.6% of middle income households and 7.4% of low income earners.
Below median defined contribution (DC) balance: "Wealth illusion" can occur when planning for retirement; many overestimate how much their savings will carry them once they retire. Middle income (7.3%) and lower income (17.9%) households with a modest DC balance are more likely to be “not worried enough” about their retirement savings.
Two earners but one saver: If you're in a dual-income household and wish to continue your standard of living into retirement, you'll have to replace both incomes. Therefore, it's important for both spouses to have a retirement plan. This factor is more prevalent among high-income homes (12.3%), compared to middle income (7.8) and low income (3.1%) homes.
Black/Hispanic household: Black/Hispanic households are "not worried enough" about retirement due to racial and ethnic gaps in financial literacy. This factor affects 7.4% of high-income households, 11% of middle income households and l6.3% of low income households.
Too worried
Alternately, you have a number of households that are overly worried about their retirement savings:15% to be exact. This sentiment is mostly prevalent among lower income earners; 20% were found to be “too worried” about their retirement savings compared to only 14% of middle income earners and 9% of high income earners.
Here are the major reasons for being “too worried," according to the Center for Retirement Research at Boston College.
Risk aversion: If your household is risk averse, then you're more likely to conservatively judge your retirement savings. This factor is most commonly seen in middle income households; 13.9% were found to be "too worried" because of risk aversion, compared to 5.7% of low income households and 3.7% of high income households.
Married one-earner: Households with one earner "may not take account of Social Security’s spousal benefit, equal to 50 percent of the benefit of the working spouse, when evaluating their retirement income," this can cause married households to be "too worried," especially lower income households (14.2% low income, 2% middle income, 7% high income).
Homeowner: Many homeowners "do not plan to tap their home equity to support general consumption in retirement," says the report. "The effect is especially large for low-income homeowners because their home represents a much higher portion of their total net worth." (19.6% low income, 6.2% middle income, 5.9% high income).
Low self-assessed financial knowledge: Households that are less confident about financial literacy and knowledge are also less confident about retirement savings and are, as a result, "too worried." (5% low income, 4.6% middle income, 6.4% high income).
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