July 11, 2001- Many individuals who earn $50,000 or less per year are not saving enough money to maintain their current standard of living when they retire, according to the latest financial retirement study by Dr. Bruce Palmer of the Center for Risk Management and Insurance Research in the Robinson College of Business. The 2001 RETIRE Project report, the fifth produced by the Center and Aon Consulting since 1988, shows that pre-retirement savings rates are down from those observed when the last report was issued in 1997.
Further, the gross income replacement ratios, or the amount of income needed by retirees to maintain their pre-retirement standard of living into their retirement years, are also somewhat different from the earlier studies. For example, a married couple with one wage earner, with a $20,000 annual salary, would need to have combined retirement income of $16,685 per year, or 83 percent of current income, to maintain the couple's standard of living. A married couple earning $50,000 would need to replace 74 percent of current income, or $37,140 to maintain their current standard of living.
At $90,000, the highest salary level examined, a married couple would need to have $68,635 of annual retirement income, or 76 percent of pre-retirement salary, to maintain the couple's standard of living during their initial year of retirement. Further, these dollar amounts will need to be greater in later retirement years, commensurate with increases in the cost of living. For single wage earners, the income replacement ratios are a bit lower at $20,000 (78 percent), the same at $50,000 (74 percent), and somewhat higher at $90,000 (82 percent) when compared with the ratios for a married couple.
The models used in the study incorporate the differences in federal, state and local income taxes between the pre- and post-retirement periods, and one model takes into account changes in work-related and age-related expenditures. The percentages presented earlier are for the latter model.
Calculations are based on four scenarios: single worker, age 65; married couple with one wage earner (age 65 worker, age 62 spouse); married couple with one wage earner (age 65 worker, age 65 spouse); and married couple, two wage earners (age 65 worker, age 62 spouse). Both models also subtract estimates of pre-retirement savings based on the theory that savings do not have to be replaced to maintain one's pre-retirement standard of living. Retirement income replacement ratios calculated in the 2001 study are based on FICA taxes, federal income tax laws and social security benefit payments in effect during 2001. Consumer savings and expenditure data incorporated in the study are obtained from the 1995, 1996 and 1997 microdata sets of the Consumer Expenditure Survey.
"While gross replacement ratios at $20,000 and $30,000 are nearly identical to those in the 1997 report, replacement ratios are four to eight percentage points higher in the current study at salaries of $40,000 to $90,000," says Palmer. "Clearly, greater emphasis on saving for retirement is needed if these individuals are to achieve the higher retirement income targets."
For More Information, contact:
Dr. Bruce Palmer, 404/413-7477
bpalmer@gsu.edu
The J. Mack Robinson College of Business is one of the nation's top business schools. The College's part-time MBA program has been listed in the top ten by U.S.News & World Report for the past six years and is currently ranked as the nation's best program at a public university. In addition, the magazine lists many of the College's undergraduate and graduate programs among the nation's best. Forbes magazine list the Robinson College in the top ten for return on investment for regional schools, and Business Week ranks the College's Executive MBA program among the top leading 20 schools in the nation.
