Retirement Readiness Not Just About Money

Four noneconomic factors—health, job satisfaction, financial planning, and adaptability—are used to predict financial readiness in a new retirement readiness index that fundamentally differs from traditional predictors.

Jay Vadiveloo, professor of mathematics and director of the Goldenson Center for Actuarial Research at the University of Connecticut, set out to measure several factors that affect one’s preparedness for retirement, in an attempt to provide “a more holistic measure.” The standard way of measuring individuals’ ability to retire compares their current net assets with the projected value of those assets at some point in the future. The problem, according to Vadiveloo, is that those projections are hugely dependent on the performance of financial markets.

 “These retirement indices are directly correlated with the current state of the economy and tend to portray a negative image of retirement readiness during adverse economic times, which could be misleading,” he says.

The new National Retirement Sustainability Index (NRSI) adds four factors to the basic model of readiness—health at retirement, job satisfaction, level of financial planning and level of adaptability. These give a more complete picture of what a person’s retirement is apt to look like, Vadiveloo says in the report, and they broaden the list of options people may use to improve their retirement outlook, even during an economic downturn.

“Perhaps the easiest example is health,” Vadiveloo says. “The healthier you are at retirement, the lower your health care costs are going to be.” An individual who invests in his own health through diet and exercise, for example, will improve his retirement outlook.

Adaptability is the noneconomic driver with the greatest impact on the NRSI for both the working and retiree population, according to the report. Individuals who have more “adaptability”— the ability and willingness to try different types of work—are likelier to earn supplementary income after retirement, which improves their retirement outlook. This factor captures a retiree’s potential and is not a measure of the actual part-time income retirees earn.

A retired professor in good health, for example, has the potential to pick up some part-time teaching duties to supplement her retirement assets, and the adaptability measure attempts to estimate this potential income and its impact on retirement sustainability.

Although the index cannot project happiness or satisfaction at retirement, it is using those noneconomic inputs to construct a more complete picture of financial readiness at retirement. According to Vadiveloo, the index demonstrates that people should view retirement readiness as a state of affairs they can personally manage and control, and not as a manifest destiny driven by economic conditions.

A report, “National Risk Sustainability Index (NRSI): A Paradigm Change to Measuring Retirement Preparedness,” details the factors considered in the new retirement readiness measure and describes the methodology for constructing the index. The report can be found here.

.