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Are Americans Prepared for Retirement?

America has a retirement income problem. Retirees today are less prepared than they were in the past. And that’s because the world has changed, but the pattern of wealth accumulation hasn’t.

The ratio of wealth-to-income from the Federal Reserve’s Survey of Consumer Finances is something of a proxy for how well prepared people are to replace their earnings once they retire.

In the nine surveys that were conducted between 1983 and 2007, the ratio of wealth-to-income was stable…too stable (followed by alarming drop in 2010 in the wake of the financial crisis). The fact that the ratio was constant for so long is not a comfort, it’s a concern.

Source: Center for Retirement Research at Boston College

It’s a concern because people are living longer, health care costs have increased, and real interest rates have declined.

Between 1983 and 2007, life expectancy at age 65 increased 3.5 years for men and 1.8 years for women. That means that workers should accumulate more wealth to support themselves during a longer retirement.

Source: Center for Retirement Research at Boston College

Health care costs have risen significantly. Even those with Medicare coverage have seen their out-of-pocket expenses jump. For example: from 1983 to 2007, out-of-pocket expenses under Medicare Part B rose from 7.5 to 17% of Social Security benefits.

Source: Center for Retirement Research at Boston College

Real interest rates have fallen notably since 1983. And because higher interest rates generate more retirement income out of a given amount of wealth, lower rates mean that a given amount of wealth will generate less income.

Source: Center for Retirement Research at Boston College

Times have changed in ways that require greater wealth accumulation to support retirement. But the constant (then declining) ratio of wealth-to-income recorded over the past nearly three decades tells us that Americans have been increasingly unprepared for retirement.

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