Abstract
In this article, the author describes and applies a model that finds that retirement income adequacy improved slightly in 2013. Because of increases in financial market and housing values, the probability that Baby Boomers and Generation Xers would not run short of money in retirement as measured by the EBRI Retirement Readiness Ratings (RRR), rose between 0.5 and 1.6 percentage points. Model simulations find that eligibility for participation in an employer-sponsored defined-contribution (DC) plan remains one of the most important factors for retirement income adequacy. Future Social Security benefits make a very large difference for the retirement income adequacy of some households, especially Gen Xers in the lowest-income quartile. In addition, longevity risk and stochastic health-care risk are associated with huge variations in retirement income adequacy. A great deal of the variability in retirement income adequacy could be mitigated by appropriate risk-management techniques. For example, the annuitization of part of DC plan and IRA balances may substantially increase the probability of not running short of money in retirement. Moreover, a well-functioning market in long-term care insurance could help control the volatility of long-term health care expenditures, especially for middle-income households.
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