Sunday, May 13, 2012

“Opportunity” Costs

When I was 16, my family moved from a small town in Southern Illinois to the suburbs of Chicago.  It was a move that was to change my life in ways I could not have even imagined at the time.  Had that move not occurred, I’d likely have wound up at a different university, might well have chosen a different major, and almost certainly would never have stumbled across the college internship doing pension accountings that has, many years later, brought me here today. 

As you might expect, those possibilities were not obvious to me at the time of that move.  But looking back, the reality is that that move greatly expanded the life choices—and thus, the opportunities—available to me at a particularly critical point in my life.

At EBRI’s Research Committee meeting this past week, Research Director Jack VanDerhei shared the updated findings of the EBRI Retirement Readiness Rating (RRR), which will be published later this month.  The Retirement Readiness Ratings measure the percentage of simulated life paths in retirement that are at risk of inadequate retirement income.  Simply stated, a household’s simulated lifepath in retirement is considered to be at‐risk in the baseline version of the model if its aggregate resources in retirement are not sufficient to cover their aggregate minimum retirement expenditures(1).  Previous research by EBRI has demonstrated that one of the most important factors contributing to retirement income adequacy for the Baby Boomers and Gen Xers is eligibility to participate in employment-based retirement plans. 

In fact, the updated version or the RRR shows that the number of future years workers are eligible for participation in a defined contribution plan makes a tremendous difference in their at-risk ratings. For example, according to the simulation results, Gen Xers with no future years of eligibility would run short of money in retirement more than half (60.7 percent) of the time—a circumstance that would effect just 1 in 5 of those in that demographic with 20 or more years of future eligibility. 

And, bear in mind, that’s the kind of difference in outcome that results from mere ELIGIBILITY, thanks to their likely participation when a program is available, boosted by design enhancements like automatic enrollment and contribution acceleration.

My kids have the chance to learn from my past—to ask about the availability of a workplace retirement savings plan during their job interviews—and to take early advantage of that opportunity.

After all, it’s hard to take advantage of an opportunity you don’t have.

-          Nevin E. Adams, JD

(1)  In EBRI’s RRR, aggregate minimum retirement expenditures are defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of income and age) and  some health insurance and out‐of‐pocket health‐related expenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point such expenses are picked up by Medicaid). The resources in retirement will consist of Social Security (status quo benefits for the baseline version of the simulation), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities or lump-sum distributions from defined benefit plans (unless the lump‐sum distribution scenario is chosen), and (in some cases) net housing equity (in the form of a lump‐sum distribution at the point that other financial resources are exhausted). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates, standard‐of‐living, and other thresholds.  More information on the RRR is available in the July 2010 EBRI Issue Brief online here.   

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