Baby Boomers need an even higher wealth-to-income ratio than their parents had if they want to live securely in retirement, according to a research brief by the Center for Retirement Research at Boston College. That’s because of an increased life expectancy, the shift to 401(k) plans, higher health care costs and lower real interest rates.
The report examined the wealth-to-income ratios from 1983 through 2010, information which was gleaned through the Survey of Consumer Finances (SCF), the Federal Reserve’s comprehensive triennial survey of household wealth in the United States. The notion is that the wealth-to-income ratio is a good proxy for the extent to which people can replace their pre-retirement earnings in retirement.
The brief concluded that the stable wealth-to-income ratio recorded between 1983 and 2007 should “never have been a source of comfort. The world has changed in important ways that all require more wealth to sustain living standards in retirement,” according to Alicia H. Munnell, the brief’s author.
The data showed a sharp decline in the wealth-to-income ratio in 2010, which signaled more serious problems for future retirees.
Wealth includes all financial assets, 401(k) accumulations and real estate less any outstanding debt. Income includes earnings and returns on financial assets. According to the brief, the wealth-to-income ratio is a good indicator of the extent to which people can replace their pre-retirement earnings in retirement.
Life expectancy increased between 1983 and 2010. In 1983, men were expected to live on average 15 years in retirement and women almost 19 years. By 2010, those numbers rose to nearly 19 for men and nearly 21 for women. Because of those additional years, people need to accumulate even more wealth to keep up in retirement.
The brief concluded that the stability of wealth-to-income ratios over the nine SCF surveys between 1983 and 2010 should always have been a serious source of concern because the pattern of wealth accumulation remained virtually unchanged. This suggests that people were increasingly less prepared for retirement. The significant decline in the ratios of wealth to income for each age group reported in the 2010 SCF “is truly alarming,” the report said.