Expenses Are What Matters Most…
The Employee Benefit Research Institute (EBRI) is one of my go-to groups for studies on retirement planning.
So, it was of interest when a subscriber sent me an article from the EBRI which seemed to challenge my optimism when it comes to retirement for most Americans.
Jack Van Derhei was the author of the piece titled ““Short” Falls: Who’s Most Likely to Come up Short in Retirement, and When?” Read the article here.
Now, be advised, EBRI articles are not for reading while you have the game on in the background. You really need to be focused because of the information these guys provide. In fact, I had to re-read this article a couple times before it finally sunk. I even had to sleep on it and then woke up this morning to read it AGAIN! (Not the sharpest knife in the drawer, am I?)
Upon conclusion though, I realized this piece of research is anything BUT a challenge to my optimism, if anything it’s a confirmation!
Why? Because it shows the vast majority of Americans are NOT at risk of running out of money, even over a 35 year retirement, even with long term care costs and nursing homes factored in. Those in the bottom quartile of income have high risk, indeed, but the rest of the population is simply not at much risk.
Ironically, this follows almost to the T what other research has shown when talking to actual retirees. They find 75% of them are doing just fine and living comfortably. See my video here where I talk about this. Gallup polls are always fun to look at too.
The EBRI study shows the vast majority of Americans are not at risk of running out of money in retirement, yet you really have to dig through the data to come to that conclusion. The languaging is framed MUCH differently. As such, naysayers may latch on to this as “proof” retirement is in crisis mode.
But here’s my real problem with this paper, and many other papers written about retirement; Much of the research overlooks what the primary issue in retirement is, expenses.
Most research has analytics focused on how much a portfolio you have at retirement and how much of that you can spend without running out of money. But how about the ACTUAL expenses a retiree will face? How is that calculated?
I could care less about your retirement account balances if you have a pension and Social Security that cover your expenses. On the other hand, if you have two mortgages, still paying off student load debt and leasing two vehicles, having $1 million in retirement assets doesn’t look so good.
Who is more at risk of running out of money in those cases? Is the first guy with the pension and Social Security but lower assets more at risk? Is he in a worse place financially than the other guy?
I don’t think so.
In this paper, they use the AVERAGE expenses of post 65-year-old retirees. Yet, they don’t say from where those average expenses come. The BLS? SCF? HRS?
The paper also uses average income levels to help determine expenses. Is this income from the 1040? If so, is it AGI or Taxable Income? Or is this income from what the Census Bureau estimates which we know is lacking BIG TIME?? See my video here on that topic.
All in all we have no clue, from what I could gather, how they derived at the average expenses. As such, how can we make an accurate prediction at all as to the true risk YOU face as a soon-to-be-retiree?
If my expenses are $80k and yours $40k our average is $60, no? But that average does not at all necessarily mean I have twice the income as you. These two things are not correlated to the extent one should feel comfortable using average expenditures based on average income. There are just too many other variables to consider.
And this gets to my whole reason to exist as a retirement planning researcher. Until we know your expenses we can’t run accurate retirement plans. Sure we can get an idea, a gauge, an opinion. But that is NOT GOOD ENOUGH! Not when it’s YOUR specific retirement we’re talking about.
So, until you can find out for sure how expenses are accounted for, I’d encourage to read ANY and ALL retirement papers with a jaded eye.