Vanguard’s new Retirement Outlook report is a mixed bag.
The bad: Baby boomers and Gen X may be in a heap of trouble. The good: The generations coming behind may be in better shape.
The report’s analysis is based on a range of historical data from the Federal Reserve Board, the Social Security Administration, and mortality tables from the Society of Actuaries, among other databases.
Let’s tackle the not-so-good news first.
Roughly 6 in 10 Americans are not on track to be financially secure in retirement, according to the report. Among workers aged 61 to 65 — those slowly sliding out of the workforce at the moment — only the top 30% of income earners, or those earning between $67,000 and $436,000, are ready for retirement.
Read more: What is the average retirement savings by age?
The rest will rely heavily on Social Security, the researchers found. And that’s not good.
This highlights the pressing need to address the depletion of the Social Security trust fund in eight years, when, if no adjustments are made, the program’s fund will be able to pay out just 77% of benefits to seniors.
“The definition of a successful retirement is personal and varies,” according to the report’s co-author, Fiona Greig, global head of investor research and policy. However, “a common goal is sustaining one’s lifestyle in retirement, so we define retirement readiness as having enough wealth to support a comparable level of spending in retirement.”
Things are better for the up-and-coming generation, according to the Vanguard researchers.
Workers aged 24 to 28 and millennials are projected to be far better prepared for retirement than the boomers. And the younger Gen Xers, who range in age from 45 to 60, are too.
“[We] define retirement readiness as having enough wealth to support a comparable level of spending in retirement,” according to Fiona Greig, global head of investor research at Vanguard. · Flashpop via Getty Images
Why? They’ve had the benefit of broader access to employer-provided direct contribution plans such as 401(k)s, which were just becoming mainstream when the older workers kicked off their working lives back in the 1980s and traditional pensions were disappearing.
Moreover, the younger generations have had the good fortune to reap the benefits of these plans’ newer features. Those include auto-enrollment when you start a job and auto-escalation of retirement savings each year. About 60% of direct contribution (DC) plans today have auto-enrollment, up from just 10% in 2006, and about one-third of plans have a default contribution rate of 6% or higher, with the median DC plan participant contributing more than 11% per year.
That has been a game changer. Workers with DC plan access are dramatically more likely to be invested in the stock market and benefit from potential long-term investment returns, the data found. Estimated equity and cash allocations for those with DC plan access are 40% and 30%, respectively, compared to 10% and 80% for those without access.
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Another helpful plus is the seismic rise of target-date funds as an investment option in these plans.
Target-date funds are now the sweet spot of retirement savings. Nearly all 401(k) plan sponsors and most state auto-IRA programs use target-date funds. With targets, you choose the year you’d like to retire and buy a mutual fund with that year in its name (like Target 2044). The fund manager then divvies up your investment between stocks and bonds, typically made up of index funds, tweaking that to a more conservative mix as the target date nears.
Read more: How to catch up on retirement savings
But the bigger picture is particularly bleak if you don’t have access to an employer-sponsored 401(k) type plan, and about half of American workers don’t, particularly those who work for smaller companies or are contract workers.
Workers with access to DC plans are twice as likely to reach retirement savings goals as those without—54% vs. 28%, respectively. If all workers had DC plan access, retirement readiness would rise to 61%, according to the Vanguard report.
To date, 17 states have implemented or enacted employer-sponsored automated retirement savings through a Roth IRA to help workers at small companies save for retirement.
“The US retirement system has a strong foundation, which continues to improve as employers expand DC plan access and implement stronger DC plan design,” Greig told Yahoo Finance.
Why such gloom in this report? The Vanguard outlook is more pessimistic because the researchers tossed in growing debt levels and cash-heavy asset allocations in savings accounts and excluded home equity, which can make a difference in future financial security, according to this analysis.
For many of those baby boomers and Gen Xers nearing retirement, unlocking home equity may be a viable strategy to help make up for a savings shortfall, the researchers said. Sizable chunks of each of these cohorts own significant home equity wealth.
Another way to right the ship?
Work longer. Working two years longer — until age 67 — could add another 13 percentage points to readiness, the researchers found. You might even find you like it.
Adding two more working years would help an additional 1 in 10 workers across all generations achieve retirement security. At the median, Gen Z and millennial workers would see a spending gap turn into a surplus, while Gen X and baby boomer workers would see their projected spending gaps reduced significantly.
Have a question about retirement? Personal finances? Anything career-related? Click here to drop Kerry Hannon a note.
Roughly 20% of people age 65 or older were employed in 2023, and that figure is expected to increase in the future with improved education and health, as well as more age-friendly, less physically demanding occupations, per the researchers.
Said Greig: “Working two years longer would result in more career savings, higher Social Security income from delayed claiming, and fewer years of retirement to fund.”
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including the forthcoming “Retirement Bites: A Gen X Guide to Securing Your Financial Future,” “In Control at 50+: How to Succeed in the New World of Work,” and “Never Too Old to Get Rich.” Follow her on Bluesky.
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