Everyone wishes they were rich, but most people are not. However, having a high income doesn’t necessarily mean that one is in the best financial shape. In fact, many are not.
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The Center for Retirement Research at Boston College analyzed the National Retirement Risk Index (NRRI), which measures the percentage of working-age households that are at risk of being financially unprepared for retirement.
Some of the results were alarming, especially about the wealthy:
- More than 25% of all U.S. households think they’re on track to maintain their standard of living in retirement but are actually at risk of falling short. The wealthy are most likely to hold this false point of view.
- 29% of American households are “not worried enough” about retirement savings, with the largest percentage being the highest earners at 32%.
- Those “not worried enough” are more likely to have higher incomes and may misjudge how much their assets can provide.
- Higher-income earners have a larger housing debt-to-asset ratio (23.8%) compared with middle and lower-income people, 7.6% and 7.4% respectively.
“If they’re not aware they should be saving more, they run the risk of having to cut back their consumption — perhaps substantially — in retirement,” explained Anqi Chen, senior research economist and assistant director of savings research at the Boston College Center, to CNBC.
The rich tend to misjudge how far their retirement savings can take them. Here are three ways:
The Rich Fall for a ‘Wealth Illusion’
Surging stock and housing markets have contributed to a “wealth illusion” among the wealthiest individuals. However, while the rich tend to have more assets and investments, they also tend to have bigger lifestyles that require more money to sustain.
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For example, about 24% of affluent households who underestimated their retirement risk had a large amount of housing debt relative to their home equity. This figure is three times more than middle and lower earners.
“The ones who worry me the most are the people who think they’re in good shape but they’re not,” said David Blanchett, head of retirement research at PGIM, the investment-management arm of Prudential Financial, to CNBC.
People Are Living Longer
The fact of the matter is that Americans are living longer these days, and the average lifespan is likely to increase as medical technology advances. The rich need to save even more money for retirement to sustain their lifestyle for more years. The longer you live, the more money you’ll need to have, and the rich are not immune to this reality.
College Education and Healthcare Costs Are Rising
Maintaining a wealthy lifestyle in retirement is getting increasingly difficult. The cost of sending your child to college is on the rise, and funding their education isn’t going to be cheap. The rich may need to spend more money to fund their child’s education just like everyone else, which can take a bite out of their finances. At the same time, healthcare costs continue to climb. This means that the rich need to have enough saved to afford higher medical expenses in retirement, too.
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This article originally appeared on GOBankingRates.com: 3 Ways the Rich Often Misjudge Their Retirement Savings
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