Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52 Page 53 Page 54 Page 55 Page 56 Page 57 Page 58 Page 59 Page 60 Page 61 Page 62 Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Page 73 Page 74 Page 75 Page 76 Page 77 Page 78 Page 79 Page 80 Page 81 Page 82 Page 83 Page 84 Page 85 Page 86 Page 87 Page 88 Page 89 Page 90 Page 91 Page 92 Page 93 Page 94 Page 95 Page 96 Page 97 Page 98 Page 99 Page 100 Page 101 Page 102 Page 103 Page 104 Page 105 Page 106 Page 107 Page 10851 CHAPTER 3 | ECONOMIC PREPAR ATION FOR RETIREMENT Using HRS data on all three sources of retirement income, numerous studies address the following questions: How much do Americans need to save? Do we have enough to retire at the ages we are currently electing to stop work? Is the concept of a replacement rate itself in need of updating? A wide range of research is exploring these questions from many different angles with findings that are sometimes at odds. Results depend, to some extent, on how adequacy and wealth are measured, and assumptions made regarding retirement patterns and spending — particularly on medical and long-term care. Determining Adequacy Reviewing some of the earliest HRS studies on this topic that use information from the first wave of the HRS in 1992, one study shows that the average household could achieve a replace- 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. Scholz et al. (2006) incorporate a more complete set of potential factors affecting house- hold financial decision-making such as family size, uncertain longevity, uninsurable earnings and medical expenses, progressive taxation, government transfers, and pension and Social Security benefits. Fewer than 20% of households under-save relative to optimal targets. Updating the model with HRS data from more recent cohorts, Scholz and Seshadri (2008) show the per- centage of households not meeting optimal target replacement rates could be as low as 4%. However, traditional replacement rates do not account for the fact that adults in households with children have higher spending during their working years but lower spending when their children move out. Their target replacement rates could be lower on average than households without child-related expenses (Scholz and Seshadri 2007). Most replacement rate calculations do not include the value of housing and other assets, which could potentially be converted into an an- nuity payment. Annuities can be purchased with various conditions but generally require a large lump-sum payment in exchange for a guaranteed monthly payment for life. Including annuitized wealth substantially increases replacement rates (Purcell 2012). For those with very high wealth, full annuitization could overshoot the mark, lead- ing to replacement rates well in excess of 100%. One solution to a retirement shortfall: delay claiming benefits until age 65 to significantly increase retirement wealth.