Mar 20 2014

Your Retirement Readiness Greatly Depends On These Two Big Swing Factors

Rolling The Retirement Readiness Dice

Have enough to retire? Some leading retirement researchers have shown that how much you will spend on health care in your retirement, and how long you will live are huge swing-factors in how “retirement ready” you are. Of course your life span and health costs in retirement are unknowable – so what can we do about this? Do we just throw the dice?

Much academic research goes into personal finances and retirement. What are the variables that really matter when it comes to having sufficient income to meet your expenses in retirement?  One source of in-depth analysis on this and many other financial issues is the Employee Benefit Research Institute (EBRI) in Washington D.C.

A paper by the EBRI called Retirement Readiness Rises in 2013, but Varies by Income and 401(k) Access looked at the, “Overall retirement income adequacy for Baby Boomers and Generation X households” – or another words, what factors determine whether you will run out of money in retirement?  (for more on EBRI’s “retirement readiness rating” go here)

The EBRI looks a host of factors that would cause one person to face financial ruin, versus lifetime financial independence. Some of the findings are quite instructive. Just keep in mind, EBRI is not factoring in the outlook of healthy life extension and technological disruption. I’ve added my future-of-retirement comments below three of the paper’s major findings.

Life Span and Health Care Costs Are Big Swing Factors

As the paper explains,

“The risks of a long life and high health-care costs drive huge variations in retirement income adequacy. For both of these factors, a comparison between the most “risky” quartile with the least risky quartile shows a spread of approximately 30 percentage points for the lowest income range, approximately 25 to 40 percentage points for the highest income range, and even larger spreads for those in the middle income ranges.”

What this means is, even with using EBRI’s “normal” life span and health care cost assumptions, where you wind up on these two spectrums (long or short life, big or small health care costs) will have a huge impact on “retirement readiness”. These two variables are especially crucial for middle income earners – presumably because those in low incomes will try and spend less and rely on government subsidies. Meanwhile, those with high incomes would have money to pay for expensive treatments and not derail retirement security.

Now what happens if we take into account that medical science is advancing rapidly and will eliminate and treat most diseases and extend healthy life spans? Obviously, the longevity factor becomes much bigger. The very high likelihood that there will be initial higher costs to new therapies and drugs means we may need even a bigger health care reserve to pay for them. So we can see that BOTH of these swing factors will swing much wider when you consider life in the age of accelerating technological advances. My guestimate is that over 80% of people will have inadequate financial resources to meet this future.

Financial Strategies to Reduce Risk of Running Out of Money

The EBRI study then looks at how to deal with these retirement wild cards.
“Annuities and long-term care insurance could mitigate much of the variability in retirement
income adequacy at or near retirement age. For example, the annuitization of a portion of the
defined contribution and individual retirement account (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 would appear to provide an extremely useful technique to help control the volatility from the stochastic, long-term care risk, especially for those in the middle income quartiles.”

Retirement Nest Egg At Risk?

Life annuities pay you an income for life, so indeed they would seem to be good tools to help fund extra long lives and extra health care costs. However, the longer you live, the more likely inflation could make your annuity income seem inadequate. Indexed annuities exist, but are quite expensive. Meanwhile, long term care insurance pays you an income if you meet certain limitations due to ill-health.  But, future health advances, if we take advantage of them, will cure disease while health care insurance typically only pays out if you continue in a state of impaired health.

Both annuities and LTC insurance are currently limited in being able to help fund our retirement in the future. Critical Illness insurance, which pays a lump-sum to you when you are diagnosed with a broad list of illnesses would, I propose, be a better fit for the future.

How Will Government Pensions Afford Paying Out Over Much Longer Life Spans?

A third key issue identified by the paper has to do with the funding squeeze of having to pay out pensions to people who live 100, 120 or 150+ years! These plans were not designed for age 90, let alone much longer.

“Future Social Security benefits make a huge difference for the retirement income adequacy

of some households, especially Gen Xers in the lowest-income quartile. If Social Security

benefits are subject to proportionate decreases beginning in 2033 (when the Social Security Trust Fund is projected to run short of money), the RRR values for those households will drop by more than 50 percent: from 20.9 percent to 10.3 percent.”

The “RRR” or “Retirement Readiness Rating” is the EBRI’s quantitative way of measuring the risk of running out of money in retirement. Healthy life spans beyond age 120 are not part of the calculations. So let’s just say, the problem of funding government paid pensions would be even more massive than the serious shortfalls EBRI would project. Also, healthy life extension will first be available to prepared boomers – so this is not just a Gen X issue in the future.

The messages are clear. Once you bring radical extension of healthy life spans into the equation, the current retirement logics and models break down. It is time to put away the outdated framework of trying to build the “Golden Retirement Nest Egg” and look with open eyes at how our future will unfold.

We are in a transition to radical healthy life extension. It looks likely to be about 15-20 years away before we may see biomedical breakthroughs sufficient to add more than one year of life expectancy for each year of life. The take-aways here are; plan on a long life, plan on needing a good sized health care reserve,  plan on pension payments being cut back, plan on continuing to earn an income – hopefully from a rewarding, meaningful livelihood.

Live long, live well, and prosper!


The full EBRI report, “What Causes EBRI Retirement Readiness RatingsTM to Vary: Results from the 2014 Retirement Security Projection Model,®” is published in the February EBRI Issue Brief, online at

Photos courtesy of

Permanent link to this article:

Leave a Reply

Your email address will not be published.

Facebook Like Button for Dummies