Definition
Retirement readiness is a participant's preparedness — measured across accumulated balance, projected income sources, expected expenses, and expected lifespan — to sustain their intended standard of living from retirement onward.
Why it matters
Retirement readiness is a composite framing that combines accumulation-side factors (balance built up) with decumulation-side factors (how the balance will produce income, over what horizon, under what claim structure). Recordkeepers, plan sponsors, financial firms, and academic researchers each construct retirement readiness metrics using their own methodologies. Retirement readiness scores are consequential in practice — participants act on them, sponsors monitor them, regulators reference them — but the score's methodology substantially determines what the score means.
How it works
A typical retirement readiness assessment takes as inputs the participant's current balance, projected additional contributions, expected retirement age, expected lifespan, expected retirement expenses, and expected non-plan income sources such as Social Security. The methodology combines these into either a probabilistic assessment (a percentage or score representing the likelihood that the participant's resources will fund their expenses across the projected horizon) or a categorical assessment (on-track versus not-on-track thresholds). Different methodologies produce different scores from the same underlying facts because they embed different assumptions: horizon (life expectancy or a survival-distribution percentile), income conversion structure (solo drawdown assumption, systematic withdrawal, annuity-equivalent), discount rate, expense pattern, and treatment of tail-risk expenses such as long-term care. A participant assessed at 87% readiness under one methodology may be at 62% under another; the underlying facts are the same, but the methodological choices differ.
In practice
For a participant receiving a retirement readiness score, the operative questions are about the score's methodology rather than its number. Questions to a professional or a recordkeeper: what horizon is assumed, what income conversion structure is assumed, what discount rate is used, what expense pattern is projected, and what happens to the score if the horizon is extended by five years or if the conversion structure is changed from systematic withdrawal to an annuity-equivalent. A retirement readiness score does not evaluate the specific arrangement the participant will use to convert balance into income; that evaluation happens separately, at the point of decumulation, when the actual conversion structure is selected.
Related terms
- Retirement income adequacy
- Income replacement in DC context
- Accumulation phase
- Decumulation phase
- Cost of income
- Solo drawdown
- Longevity risk
- Cost of extra protection