PLANSPONSOR - October 2017 - 15

How More
Retirees
Could Affect
Investment
Returns
AS the Baby Boom generation continues to
retire, and draw down the assets they built
up in their working years, the retirement
system in America and capital markets
could go through some major shifts.
The Center for Retirement Research
at Boston College (CRR) explores this
premise in several recent white papers.
One addresses the impact that shifting
demographics can have on investment
Children's
Impact on
Retirement
Security
HOUSEHOLD expenditures obviously
increase with the addition of children.
Without adequate control on spending
and saving, these additional costs could
place a major strain on the retirement
preparedness of older working Americans.
The Center for Retirement Research at
Boston College (CRR) explores this issue
and potential solutions in its paper " The
Impact of Raising Children on Retirement
Security. "
The CRR cites research from the
Organization for Economic Cooperation
and Development (OECD), which indicates
that the costs for a family of four are 140%
returns. The CRR notes, " Economic
theory suggests that retirees draw down
the assets they accumulated in their
working lives, so a higher retiree-[to]worker
ratio reduces the supply of savings,
thereby increasing investment returns. "
However, the paper cites research
based on the long-running Health and
Retirement Study from the Survey
Research Center (SCR) at the University
of Michigan's Institute for Social Research
(ISR), which suggests that retirees
draw down savings at a slower rate than
expected, especially the wealthy, who hold
the majority of assets.
So, as retirees retain much of their
wealth, a higher retiree-to-worker ratio
instead leads to a greater supply of savings
and a decrease in investment returns,
the CRR suggests. Still, the organization
notes, the extent of this potential decrease
is uncertain. Clearly, to the extent that
of those for two adults. Just adding one
child brings that figure to 120%. Moreover,
the CRR notes, children also negatively
affect parents' income, as a result of
reduced involvement-particularly for
women-in the labor force.
However, the CRR says, the real
problem lies in the way household
spending is handled when children enter
the equation. Notably, retirement preparedness
can be put at risk when parents boost
household spending after having a child
and maintain that level of consumption
after the child leaves their care.
The CRR suggests two ways families
can strategically plan for retirement
preparedness while considering children.
First, parents can keep household
spending steady over time, while sharply
cutting back spending on themselves. The
other option involves planning for higher
household consumption while children
are at home and cutting back when adult
children leave the nest.
" Either way, households would accuinvestment
returns have lessened,
workers would need to save more to maintain
their standard of living.
The organization points out that the
shift in employer plans from traditional
pensions to 401(k)s means the savings
of the elderly will increasingly be held in
401(k)s or individual retirement accounts
(IRAs). The need to save more in these
accounts could be heightened by a weakening
Social Security system.
The CRR notes that " the demographic
transition is largely responsible
for Social Security's long-term financing
shortfall. If it reduces investment returns,
it will also weaken the other component of
the nation's retirement income system-
private saving. " In another paper, the CRR
analyzed a possible remedy to the Social
Security downfall: investing a portion of
the Social Security Trust Fund in stocks.
-Javier Simon
mulate enough wealth to maintain their
standard of living in retirement, " the
CRR notes.
Moreover, children can also adversely
affect overall wealth. In the study,
" wealth " refers to financial assets, savings
in defined contribution (DC) plans, net
housing wealth, and the pro-rated value of
defined benefit (DB) and Social Security
income. The study concludes, " In terms
of wealth, each child is associated with
roughly 34% less wealth. "
To gauge retirement preparedness,
the CRR referred to the National
Retirement Risk Index, calculated by
comparing households' projected replacement
rates-retirement income as a
percentage of pre-retirement income-
with target replacement rates that would
allow them to maintain their standard of
living. These calculations are based on the
Federal Reserve's Survey of Consumer
Finances, a triennial survey of a nationally
representative sample of U.S. households.
-Javier Simon
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