Will the Rebound in Equities and Housing Save Retirement?

The National Retirement Risk Index (NRRI) measures the share of working-age American households “at risk” of being unable to maintain their pre-retirement standard of living in retirement. The Index is calculated by comparing households’ projected replacement rates – retirement income as a percent of pre-retirement income – with target replacement rates that would allow them to maintain their standard of living. These calculations are based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households. The most recent survey is 2010. (2013 is currently in the field.) As of 2010, the NRRI showed that, even if households worked to age 65 and annuitized all their financial assets (including the receipts from reverse mortgages on their homes), 53 percent of American households were at risk. Since 2010, in inflation-adjusted terms, the stock market has increased by 45 percent and house prices have risen by 6 percent. The question examined here is how the 2010 picture would have looked if equities and housing were at 2013 levels. The discussion proceeds as follows. The first section briefly describes the nuts and bolts of the NRRI and the nature of the current experiment. The second section presents the results. The key finding is that improving asset markets have only slightly lowered retirement risk because the increases in house prices have been modest, and the more robust growth in stocks mainly benefits the top third of households. The third section explains why, even with the market rebounds, the picture still looks worse than 2007. The final section concludes even substantial increases in asset values have only a modest effect on the NRRI. Half of American households remain at risk, and the only real solutions are to save more and/or work longer.