Thursday, November 5, 2009

What is your R-score? Free online retirability check

More than 40 percent of households ‘at risk’ of being financially unprepared for retirement don’t know it, and the picture is even worse when accounting for health care, according to the most recent findings by the Center for Retirement Research (CRR) at Boston College. The latest analysis of the National Retirement Risk Index (NRRI), released by the CRR, examined whether households have a good sense of their retirement preparedness by comparing their self-reported assessments to their ability to maintain living standards in retirement as measured by the NRRI.

The National Retirement Risk Index, updated in October, 2009 by the CRR, shows that 51 percent of today’s workers will be at risk for not being financially prepared to retire. The 7-point increase from the previous Index number of 44 percent – released in July 2007 – demonstrates how the surging cost of health care is having a significant effect on retirement savings. The NRRI, underwritten by a grant from Nationwide, is a percentage measurement of how many working Americans are ‘at risk’ of being unable to maintain their standard of living in retirement.

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“While recent studies have found that households are not generally knowledgeable about personal finance issues, we wanted to know whether they have a good gut sense of their own retirement preparedness” said Alicia H. Munnell, CRR director. “We found that nearly 60 percent do and nearly 40 percent do not. Some worry too much. Some worry too little.”

Specifically, 24 percent of households ‘worry too much’ – they report being inadequately prepared for retirement while the NRRI says they are not ‘at risk.’ On the other hand, 19 percent ‘worry too little’ – they report having enough resources for retirement while the NRRI says they are ‘at risk.’
“Almost half of households considered themselves to be ‘at risk,’ slightly above the NRRI calculation of 44 percent,” said Paul Ballew, senior vice president of customer insights and analytics for Nationwide. “But add in the reality of health care costs in retirement, which drives up the NRRI ‘at risk’ number to 61 percent, and the gap between self-assessment and reality widens.”

Factoring in health care costs increases the number of households that are not concerned enough, indicating that these escalating costs will be a major driver for not having enough saved. The CRR has estimated that a typical couple retiring in 2010 would need about $200,000 in savings to cover their out-of-pocket health care costs over their remaining lifetime. And this amount is expected to grow rapidly over time.

Ballew added that “future savings may not be the top priority for many households; they may be focused on more pressing concerns. With the current economic climate crunching Americans’ sense of financial security, it’s understandable many are focused on making ends meet in the short term. Yet, it’s important to prioritize and reorganize – rather than eliminate – your savings habits. Careful planning that addresses short term concerns while still working toward long term goals is crucial to surviving tough economic times.”

Additional findings from the brief include:

Characteristics of Americans who are ‘Too Worried’
  • Lower Income Households. Lower income households are more likely to fall into the ‘too worried’ group, perhaps because these households are not aware that they receive relatively high replacement rates from Social Security due to the program’s progressive benefit structure.
  • Married One-Earners. Married one-earner households are significantly more likely to be ‘too worried’ and significantly less likely to be ‘not worried enough.’ Many couples may not be aware that Social Security replacement rates are higher for a one-earner household and can find themselves in a better position than expected.
  • Homeownership. Owning a home significantly increases the likelihood of being in the ‘too worried group’ as homeowners often do not factor in the potential income available through a reverse mortgage.
Characteristics of Americans who are ‘Not Worried Enough’
  • Unhealthy Americans. Those in poor health are more likely than those in good health to fall into the ‘not worried enough’ group, perhaps because those in poor health are less likely to have the energy to focus on financial issues and are more likely to be adversely surprised by their preparedness for retirement.
  • Younger Age Groups. The younger the household, the more likely it is to be ‘not worried enough.’ Younger cohorts may be less well informed about the trends in the retirement income system and, therefore, less likely to perceive potential risk.

Tips for avoiding retirement planning pitfalls
Ballew said there are a number of steps consumers can take to better prepare themselves for retirement and rising costs, especially in health care.
  • Workers must take responsibility for their financial health
    Ballew said workers must take personal responsibility for their retirement planning, beginning with assessing their financial situation. He recommends consumers seek professional help with important financial matters such as planning for retirement.
“Financial professionals are not just for the wealthy,” Ballew said. “Hiring a licensed, qualified investment professional whose business and personal style suits your needs is a wise decision for most households.”

While the retirement crisis is very real, the situation isn’t hopeless. If they keep retirement savings as one of their top financial priorities, American workers can ensure their golden years are truly golden, says Ballew.

“We know that economic times today are trying, so Americans need to be saving now – both for the future and to cut costs today. With the threat of Social Security being non-existent in a few years, we all need to invest and save wisely. For example, if a person saved $25 each week for 40 years, and if their savings included a 5% yield, they would have around $165,000 saved! That’s the power of compound interest over time and only one example of how workers can save,” he said. “That $25 can come from skipping your morning coffee or dessert after a dinner out.”
  • Take advantage of resources
    “There are countless resources available to help, from investment professionals to online experiences like Nationwide Financial’s RetirAbility Check,” he said.
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RetirAbility Check ( ) is a free, interactive resource that provides users with their personal retirement readiness score — called an R-Score — to illustrate how financially on track they are for retirement. It was developed to help take the guesswork out of planning for retirement. RetirAbility Check is based on the NRRI and is being updated to reflect the major effect that health care costs are having on retirement savings.

“Nationwide is proud of its role as exclusive underwriter of the National Retirement Risk Index, as it is a call to action that can’t be ignored,” Ballew said. “Resources like the NRRI help provide guidance to investment professionals on how serious the retirement crisis is, and tips for Americans to better their own financial futures. And by leveraging the NRRI data and incorporating rising health care costs in RetirAbility Check, Nationwide Financial makes it easy for Americans to see if they are on the right track.”


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