How Well Do People Perceive Their Retirement Preparedness?

The National Retirement Risk Index (NRRI) measures the percentage of working-age households that is at risk of being financially unprepared for retirement. Since the Great Recession, the calculations show that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, roughly half of households are at risk of being unable to maintain their standard of living. This brief examines whether households have a good sense of their own retirement preparedness – do their expectations match the reality they face? That is, do households at risk know they are at risk? Understanding households’ self-assessed retirement preparedness is important because misperceptions can distort saving behaviors. Households that are not worried enough about their retirement income may not save enough even if they have the opportunity; households that are too worried may unnecessarily sacrifice their pre-retirement standard of living. The discussion proceeds as follows. The first section summarizes the NRRI. The second section compares households’ self-assessed preparedness to the objective measure provided by the NRRI to gauge whether households have accurate perceptions and how those perceptions have changed over time. The third section identifies the characteristics of the households with inaccurate perceptions – those that are either “not worried enough†or “too worried.†The final section concludes that almost 60 percent of self-assessments agree with the NRRI results and that the 40 percent of households that get it wrong do so for predictable reasons. The issue remains, however, whether unprepared households that recognize their situation are any more likely to take corrective action than those that do not.