b'CHAPTER 3 | ECONOMIC PREPARATION FOR RETIREMENTFor those in the 25th wealth percentile, includingHurd and Rohwedder take advantage of the longi- To understand more about the adequacy all sources of wealth in the form of an annuitytudinal nature of the Consumption and Activitiesof resources in retirement, HRS asks questions results in a 67% replacement rate. ReplacementMail Survey (see facing page) data to create aabout material hardships including food in-rates fall over time in retirement, however, and byconsumption path, i.e., how spending changessecurity, skipped meals, medication cutbacks, the ninth year in retirement, even a fully annu- as people age. This allows them to determine ifdifficulty paying bills, and dissatisfaction with itized household in the 25th percentile wouldassets are adequate to fund the consumption pathones financial situation. About 20% of the elderly achieve only a 60% replacement rate.through retirement.report at least one of these hardships (Levy Using a consumption-based rather than an2015). Poor health affects material hardship by Early Baby Boomers haveincome-based measure of financial well-being inlowering income and increasing OOPM spending. slightly less wealth than thoseretirement lowers estimates of poverty, especiallyEven accounting for these effects, though, poor among older widows (Hurd and Rohwedder 2006).health has a direct effect on hardship, perhaps by in the previous cohort. This is because a consumption-based measure ofmaking it more difficult to get around. adequacy recognizes that older people can spend Traditional replacement rate measures focusout of their wealth. Using the consumption pathThe Composition of Wealthon relative incomes before and after retirementto estimate retirement preparedness, Hurd andat Retirementbut do not capture the chances of falling intoRohwedder (2012) suggest that if householdsAnother angle to consider in retirement prepara-poverty in retirement. Thus an apparentlyhave at least a 95% chance of solvency, they aretion is the value of wealth holdings at different adequate retirement replacement rate could beconsidered prepared for retirement. They accountwealth deciles for different categories of wealth. found for households living in poverty. To addressfor different risks faced by most retirees includingPoterba et al. (2013) compare all households aged this, Love et al. (2008) estimate poverty-linetaxes, widowhood, as well as different levels of65 to 69, single households, and married house-wealth, which they define as the amount ofmortality risk and out-of-pocket medical (OOPM)holds for a range of wealth deciles and wealth wealth a household needs to ensure that everyspending risk. Given this conceptualization, theycategories including net worth, Social Security, member maintains a living standard over thefind that 71% of new retirees aged 66 to 69 aredefined benefit (DB) pensions, non-annuitized poverty line throughout the rest of his or her life.adequately prepared. However, marital statuswealth, financial assets, personal retirement ac-As other studies find, the median household is inhas a big impact: 80% of those who are marriedcount benefits, and housing and other real estate reasonably good financial shape. About 18% ofare adequately prepared compared with just 55%wealth. Not surprisingly, the wealth of married households, though, have insufficient wealth toof singles. Educational level has a similarly largehouseholds is substantially greaterin many remain above 150% of the poverty level duringimpact. The lowest level of retirement preparationcases more than doublethan that of single retirement. Comparing the Early Baby Boomersis among single women with less than a highhouseholds. Taken together, Social Security and to households of the same age in 1998, they findschool education. DB pension wealth represent 34.9% of the mean that Early Baby Boomers have slightly less wealthvalue of average household wealth. Home equity than those in the previous cohort. Nonetheless,accounts for 20.2% of all wealth; the share of all median wealth, even for Early Baby Boomers,A consumption-based measurereal estate combined is 31.1%. The median net appears to be adequate. Another line of researchof adequacy recognizes thatworth at the 10th percentile is $141,465 (in 2016 uses spending in retirement to create an alterna- older people can spend out ofdollars), and at the 90th percentile is $2,029,634. tive to the replacement rate in the assessment oftheir wealth.retirement wealth adequacy. In a series of studies, 53'