Spiraling Health Care Costs Cause Sharp Rise in National Retirement Risk Index
A dramatic increase in the number of working Americans who likely won’t be financially prepared to retire is largely due to the escalating cost of health care, according to the most recent findings by the Center for Retirement Research (CRR) at Boston College.
The National Retirement Risk Index, released today by the CRR, shows that 61 percent of today’s workers will be at risk for not being financially prepared to retire. The 17-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.
“Boston College’s findings add another arrow to the quiver of pessimism — but not hopelessness — regarding the retirement savings and spending habits of Americans, especially as health care costs escalate and company- and government-sponsored retirement plans trail off,” said Paul Ballew, senior vice president of customer insights and analytics for Nationwide.
“Additional research continues to provide substantial evidence that most consumers are less prepared today for their retirement years compared to five, 10 or 20 years ago,” Ballew said. “For example, medical expenses have increased 43 percent in the last five years and will likely increase at a higher rate compared to overall consumer spending. And, health care now accounts for more than 20 percent of all personal spending; double what it was in 1970.”
Ballew said most Americans are not only uncertain about their financial situations; they have not done any specific planning to deal with it.
“The personal savings rate in the U.S. today is essentially zero,” he said. “And a recent survey by the Employee Benefits Research Institute shows that 44 percent of those respondents said they were ‘guessing’ as to how much money they’ll need to save to live comfortably in retirement. They aren’t seeking professional advice; they’re not even using available tools or other resources. Fortunately there are countless resources — many of them free — that consumers can turn to for help.”
Changes to Index reflect state of health care costs in the U.S.
The original NRRI did not explicitly identify health care consumption, but rather incorporated it as a component of total household consumption in the process of calculating the target replacement rates. When these rapidly rising costs are included explicitly, the percentage of households ‘at risk’ increases dramatically.
“We’ve said in previous Index updates that factors like declining Social Security replacement rates, the shift from traditional employer pension plans to 401(k)s, lower interest rates, and rising life expectancy all underscore the need for more retirement income,” said Alicia H. Munnell, CRR director. “The wild card was the cost of health care and, not surprising to us, it made the Index soar by 17 percentage points.
“What that means is that 61 percent of households are not on track to maintain their pre-retirement, non-health care level of consumption in retirement. The Index also shows that risk will rise for younger workers and low-income households. The number could be considerably higher once long-term care costs are taken into account, and if households do not plan rationally.
“Our research continues to demonstrate that the retirement crisis is very real, and workers must plan now for their retirement years if they want to maintain their current standard of living,” Munnell said.
The full report is available at the Center for Retirement Research at Boston College.
Overview of the National Retirement Risk Index
The National Retirement Risk Index, developed by the Center for Retirement Research at Boston College and underwritten by a grant from Nationwide, is updated twice annually. The Index is a percentage measurement of how many working Americans are ‘at risk’ of being unable to maintain their standard of living in retirement.
‘At risk’ means a household would be unable to maintain its pre-retirement standard of living in retirement. The amount of money people need while retired compared to pre-retirement varies, but is estimated to be from 65 to 85 percent, depending on household income and marital status. For example, most retirees need less than 100 percent of pre-retirement income because they tend to pay less in taxes and no longer need to save for retirement.
“The Index projects how much income households are expected to have in retirement relative to their pre-retirement income,” Munnell said. “It then compares this “replacement rate” to a target rate that would allow a household to maintain its pre-retirement standard of living. Households that fall more than 10 percent short of the target are considered ‘at risk.’
“This estimate assumes that people work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes,” Munnell said. “More realistic assumptions regarding earlier retirement and the reluctance of people to annuitize their 401(k) balances or tap housing equity would put the percentage of workers ‘at risk’ considerably higher.”
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.
Living healthier today can reduce medical costs in retirement
“When planning for retirement, one’s health is an extremely valuable asset that is often overlooked, but it can have a significant impact on the Golden Years, especially as individuals expect to live longer and therefore incur greater health care costs,” said Ballew. “Americans need to ensure they are taking into account health care costs when planning for retirement and, further, that they are taking measures now — such as proper diet, regular exercise, and check-ups – to maintain their best health possible later.”
Nationwide Better Health, a subsidiary of Nationwide, is a leading provider of health and productivity management solutions aimed at lowering health care costs, increasing productivity and improving the quality of life for employers and their employees.
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 styles suit your needs is a wise decision for most households. Nationwide has a group of financial professionals consumers can consult with for free. They can call our Consumer Solutions Center at 888-543-3756, or send an e-mail to lifepln@nationwide.com.”
While the retirement crisis is very real, the situation isn’t hopeless. If they take action now to increase their savings and investments, American workers can ensure their golden years are truly golden, says Ballew.
“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 ‘magic’ of compound interest over time and only one example of how workers can save,” he said. “There are lots of investment products available today, either through an employer, a bank, credit unions and so on. A financial professional can help consumers sort through the myriad choices to find what best suits their needs.”
Take advantage of resources
“There are countless resources available to help, from investment professionals to online planning aides, like Nationwide Financial’s free, online RetirAbility Check,” he said.
RetirAbility CheckSM (www.nationwide.com/retirabilitycheck) is an interactive resource that provides people with a basic score — called an R-ScoreSM — to illustrate how financially prepared they are for retirement. It was developed to help take the guesswork out of planning. RetirAbility CheckSM builds on the Index findings through R-ScoreSM, which is based on data derived from the Index.
“The National Retirement Risk Index indicates the retirement situation will get more serious over time,” he said. “It’s important for all people, including young Americans just entering the workforce, to have a solid retirement income plan. Making small changes will add up over time. Gradually reducing debt while increasing 401(k) savings can help workers get on the right path to a financially secure retirement,” Ballew said. “The key is to start today.”
“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. “In the next decade, 77 million baby boomers are going to reach retirement age. As Americans face declining traditional pensions, modest 401(k) balances, longer lifespans and declining Social Security expectations, our focus is to provide solutions, including education, to help people prepare for and live in retirement.”
Have “The Talk”
“One of the most important topics people put off discussing is retirement planning,” said Ballew. “In planning for your retirement, time is either a great asset or it can work against you. The earlier you start saving, the better off you’ll be. Our Have The Talk campaign provides people with valuable resources to help them overcome some of the obstacles they may be experiencing, so that they will finally have ‘the talk.’”
The most important people in your life sometimes can be the most difficult to talk with when it comes to discussing things that really matter. That’s why Nationwide partnered with Harvard communications expert Sheila Heen to develop the Have The TalkSM program and a supporting Web site, www.HaveTheTalkAmerica.com. The site provides tips, tools and a bit of humor to help people get past the barriers keeping them from actually having important discussions.
The Have The TalkSM campaign helps families address topics such as teen driving, health issues, saving for college, living wills, estate planning or any other subject that could affect a family’s wellbeing.
About Nationwide
Nationwide, based in Columbus, Ohio, is one of the largest diversified insurance and financial services organizations in the world, with more than $160 billion in assets. Nationwide ranks #104 on the Fortune 500 list. The company provides a full range of insurance and financial services, including auto, motorcycle, boat, homeowners, life, commercial insurance, administrative services, annuities, mortgages, mutual funds, pensions, long-term savings plans and health and productivity services. For more information, visit www.nationwide.com.
RetirAbility CheckSM is provided for educational purposes only and is not intended as advice. All investing involves market risk, including the possible loss of principle. Neither Nationwide nor any of its representatives give legal or tax advice. Please consult with your legal or tax advisor for such guidance. RetirAbility Check and R-ScoreSM are service marks of Nationwide Mutual Insurance Company.
Nationwide Investment Services Corporation, member FINRA. In MI Only: Nationwide Investment Svcs. Corporation.
Nationwide, the Nationwide framemark and On Your Side are federally registered service marks of Nationwide Mutual Insurance Company. Nationwide Better Health is a service mark of Nationwide Mutual Insurance Company. Have The Talk is a service mark of Nationwide Mutual Insurance Company.
Tips for Healthy Lives and Wealthy Retirements
—
Quit smoking: According to the Surgeon General, tobacco smoking remains the No. 1 cause of preventable disease and death in the United States. Quitting smoking reduces the likelihood of certain types of cancer and heart disease, so quitting today can add years to your life and dollars to your bank account.
—
Stay active: Small changes to incorporate exercise into your routine can often lead to big payouts. Taking up jogging as a hobby and buying a treadmill are becoming as credible investment strategies as putting away additional funds in your 401(k).
—
Eat healthy: Improving diet can reduce the likelihood of injury or developing heart disease, diabetes or osteoporosis; all of these conditions put strain on your health and retirement savings, especially as they progressively become more serious.
—
Take advantage of health and wellness benefits: Employer-sponsored health coaches are not only instrumental for keeping health, but are valuable resources for saving money with their focus on the long-term help of their patients. If your company offers programs, take advantage of them! Often companies provide additional incentives such as deposits to a health savings account or a cash payout for enrolling.
—
Have the Health and Wealth Talk: Discuss finances and health with your loved ones and work with your financial planner to ensure health care costs are accounted for in your savings strategy.
About Nationwide Better HealthSM
Nationwide Better HealthSM, a subsidiary of Nationwide®, is a leading provider of health and productivity management solutions aimed at lowering health care costs, increasing productivity and improving the quality of life for employers and their employees. Nationwide Better Health is the first company to truly integrate the best collection of health and productivity services available today, including health and wellness, and disease, disability, absence, medical and maternity management, while using health assessments, work-site screenings, lifestyle health coaching services, online tools and customized communications strategies to obtain best-in-class results for improving health and productivity in the workplace. The company’s offerings work together and independently to address both sides of the cost equation: increased efficiency of health and productivity programs and better employee health and well-being to reduce health care-related costs. For more information, call 866-404-6924 or visit www.nwbetterhealth.com.