b'CHAPTER 3 | ECONOMIC PREPARATION FOR RETIREMENTUsing HRS data on all three sources ofScholz et al. (2006) incorporate a morehouseholds without child-related expenses (Scholz retirement income, numerous studies address complete set of potential factors affecting house- and Seshadri 2007).the following questions: How much do Americanshold financial decision-making such as familyMost replacement rate calculations do not need to save? Do we have enough to retire at thesize, uncertain longevity, uninsurable earningsinclude the value of housing and other assets, ages we are currently electing to stop work? Isand medical expenses, progressive taxation,which could potentially be converted into an an-the concept of a replacement rate itself in need ofgovernment transfers, and pension and Socialnuity payment. Annuities can be purchased with updating? A wide range of research is exploringSecurity benefits. Fewer than 20% of householdsvarious conditions but generally require a large these questions from many different angles withunder-save relative to optimal targets. Updatinglump-sum payment in exchange for a guaranteed findings that are sometimes at odds. Resultsthe model with HRS data from more recentmonthly payment for life. Including annuitized depend, to some extent, on how adequacy andcohorts, Scholz and Seshadri (2008) show the per- wealth substantially increases replacement rates wealth are measured, and assumptions madecentage of households not meeting optimal target(Purcell 2012). For those with very high wealth, regarding retirement patterns and spending replacement rates could be as low as 4%. However,full annuitization could overshoot the mark, lead-particularly on medical and long-term care. traditional replacement rates do not account foring to replacement rates well in excess of 100%. the fact that adults in households Determining Adequacy with children have higher spendingOne solution to a retirement shortfall:Reviewing some of the earliest HRS studies onduring their working years but lower this topic that use information from the firstspending when their children movedelay claiming benefits until age 65 towave of the HRS in 1992, one study shows thatout. Their target replacement ratessignificantly increase retirement wealth.the average household could achieve a replace- could be lower on average than ment rate of up to 86% (Uccello 2001). On the other hand, Moore and Mitchell (2000) find evidence of under-saving if HRS households want to maintain their pre-retirement level of spending. In 1992, the median household in the original HRS cohort held about $945,175 (2016 dollars) in pension, Social Security, housing and other financial wealth, growing to about $1,105,069 by retirement at age 62. These households needed to have increased their savings annually by 16% if they wished to maintain their current spending and retire at age 62. Thirty percent would not need to change their savings plans, but 40% needed to have saved at least an additional 20% annually. One solution to a retirement shortfall: delay claiming Social Security benefits until age 65 to significantly increase retirement wealth.51'