they are referring to the implied "unfunded liability" that these households have relative to the required assets they will require at retirement. In particular, Roach's essay discussed the implications of lower interest rates on this calculation.
Let's say that near-retiree was planning to retire in a few years with an income of $55,000, and investments in treasuries at 5.5%. They would need a nest egg of $1,000,000. Say they were five years to go retirement in 2000, had $800,000 and were saving $25,000 p.a. Things look good.
Fast forward two years. Rates are now down to 4%, so the required nest egg to fund $55k is now $1,375,000. That's the liability side. Meanwhile, the asset side probably shrunk, courtesy of the bear.
So the prospective retiree has seen perhaps a $400,000 funding gap appear at a rather inopportune time. If individuals had to account for their assets and liabilities as corporations, state pensions, etc., then, indeed they would have negative net worths... That was what Roach and Scowcroft were discussing....
Rob Arnott discussed this recently as well... boomers have a very serious problem, and it is probably going to force many to postpone retirement and switch to cat food... |
