The Center for Retirement Research at Boston College recently published a research brief that analyzes the impact of annuitization on retirement security.
The Center for Retirement Research developed and maintains a measure referred to as the National Retirement Risk Index (NRRI). The NRRI "measures the share of American households at risk of being unable to maintain their pre-retirement standard of living in retirement."
The NRRI "is calculated by comparing households’ projected replacement rates – retirement income as a percent of pre-retirement income – with target rates that would allow them to maintain their living standard."
It is important to note that the NRRI is based on the following key assumptions:
- Households tap into their home equity through a reverse mortgage.
- That these households use the proceeds of the reverse mortgage to fund the purchase of an inflation indexed annuity.
This particular research brief looks at the impact that not purchasing an annuity has on the NRRI. Key findings of the brief include:
- Not annuitizing increases the retirement risk of all households. The baseline percentage of households at risk in the NRRI is 51 percent. Not annuitizing increases this baseline to 53 percent.
- The percentage of households at risk increases to 53 percent when households are assumed draw-down assets using the 4 percent rule.
- The percentage of households at risk increases to 60 percent when households are assumed to simply live off of the interest on their accumulated wealth.
- High income households are most impacted by the lack of annuitization because they are more dependent on the income generated by their assets (versus those who are largely dependent on Social Security).
Source: Center for Retirement Research at Boston College
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