University of Connecticut researchers recently unveiled a new tool to measure an individual’s financial readiness for retirement that is fundamentally different from traditional predictors.
The retirement index developed at UConn’s Goldenson Center for Actuarial Research is the first to incorporate non-economic factors in its calculation.
“This is a paradigm shift in how people are viewing retirement,” says Jay Vadiveloo, professor of mathematics and Director of the Goldenson Center, who set out to measure several other factors that affect one’s preparedness for retirement, in an attempt to provide “a more holistic measure.”
Standard retirement indexes measure an individual’s ability to retire by comparing their net assets today against the projected value of those assets at some point in the future. The problem with this approach, says Vadiveloo, is that those projections are hugely dependent on the performance of financial markets.
Known as the National Retirement Sustainability Index (NRSI), the new measure combines four additional factors into a basic model of retirement readiness. By measuring an individual’s health status at retirement, level of job satisfaction, amount of financial planning, and level of adaptability, the NRSI aims to provide a more complete picture of what a person’s retirement is likely to look like, and to give people thinking about retirement a broader list of options for how they can improve their outlook, even in the face of an economic downturn. According to Vadiveloo, the NRSI demonstrates that retirement readiness should not be viewed as a manifest destiny driven by economic conditions, but instead as a state of affairs that can be managed and controlled by individual actions.
“Perhaps the easiest example is health,” says Vadiveloo. “The healthier you are at retirement, the lower your health care costs are going to be.” Because the new index captures that variable, an individual who invests in their own health through diet and exercise, for example, will likely see the value of the index increase. Similarly, individuals who have more “adaptability,” the ability and willingness to try different types of work, are more likely earn supplementary income after retirement, which also increases the value of the index.
Although the index cannot project happiness or satisfaction at retirement, it is using those non-economic inputs to construct a more complete picture of financial readiness at retirement.
“We have taken these seemingly subjective measures and quantified them in a rigorous way,” he said. Vadiveloo is hopeful that the NRSI will be used by professionals in the financial services industry to help people plan for retirement.
Development of the index was supported by the Janet & Mark L. Goldenson Center for Actuarial Research at the University of Connecticut, a think tank for applied actuarial research that is dedicated to helping academia and industry work collaboratively to solve problems in the field. A full version of the report describing the index can be found here.
