By Jeanne Sahadi, CNN
A recent analysis by Morningstar’s Center for Retirement and Policy Studies projects that 45% of US households run the risk of falling short financially if they retire at 65 — or 54%, if they retire at 62.
So many workers today have largely been on their own when it comes to saving adequately for retirement. That’s thanks to a shift away from a defined-benefit pension system — where your employer fully funds fixed monthly checks paid to you in retirement — and toward a defined-contribution system in which employees are responsible for putting away the lion’s share of the money and deciding how to invest it.
The groups that drew the shortest straw in that transition are Gen Xers, the oldest of whom are within a decade of retirement age; and Baby Boomers, the youngest of whom are already in their early 60s.
For that reason, the Morningstar analysis projects Baby Boomers and Gen Xers are more likely to see shortfalls in retirement than their Millennial or Gen Z counterparts. “The shift from defined-benefit pensions to defined-contribution plans left Baby Boomers and Gen X with less time to accumulate savings,” researchers wrote.
Having access to — and participating in — a 401(k) or similar employer-provided savings plan for two decades or more will give you one of the best chances of having enough in savings and Social Security benefits to cover your living and health expenses when you retire.
But here’s the problem: Nearly half (47%) of US workers do not have access to such a plan, Morningstar estimates. And among the workers who do have access, approximately 16% do not participate.
The outlook for Gen Xers and Boomers
Morningstar’s shortfall projections are oriented toward those with two or more decades to save in the years ahead, which is time that the oldest Gen Xers and youngest Baby Boomers don’t have.
And for the youngest Gen Xers, born between 1975 and 1980, who haven’t been saving at all or not consistently, there is still time to course-correct.
But that will depend on their access to a tax-advantaged plan and their income. Morningstar estimates that 48% of Gen Xers don’t have access to a DC plan and roughly 79% don’t have access to a defined benefit pension.
Big changes needed to close the retirement savings gap
Labor economist Teresa Ghilarducci, author of “Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy,” has long argued that the individual-directed US retirement system has failed those people who put in decades of work and yet can’t afford to save enough along the way.
Policymakers have implemented some changes designed to make it easier for people to save, through new laws like Secure 2.0. Indeed, Morningstar notes that one reason why Millennials and Gen Z workers might have a lower risk of falling short in retirement than Gen Xers and Baby Boomers is because of recent features added to 401(k)s like automatic enrollment and target-date funds.
And more changes may come in the years ahead. A bipartisan bill called the Retirement Savings for Americans Act, which is based on a paper written by Ghilarducci and former top Trump economic adviser Kevin Hassett, has supporters in both the House and the Senate, and may be reintroduced for consideration when the next Congress convenes in January 2025. That bill would create a portable, tax-advantaged retirement savings program for tens of millions of low- and middle-income workers that would offer a matching contribution from the federal government.
But even if that bill becomes law eventually, it isn’t likely to offer much help to anyone who is within a decade of retirement today. For them, trying to work longer, save as much as they can while they are still collecting a paycheck and cutting back on expenses may be their best shot at trying to stay solvent in retirement.
