Are Your Retirement Savings Falling Behind?

Prospects for Americans’ retirement have gotten brighter of late. Less than 40% of working-age American households are at risk of being unable to maintain their pre-retirement standards of living in retirement, down from 47% in 2019. That’s according to the National Retirement Risk Index, which is calculated using the most recent Federal Reserve Survey of Consumer Finances. But when you dig a bit deeper into the data, the status of Americans’ retirement savings starts to seem much less rosy—measures including average retirement savings by age point to trouble ahead for many.

Bottom Line Personal asked Yimeng Yin, PhD, of Boston College’s Center for Retirement Research for the facts about this nation’s retirement savings—where savers stand, what challenges they face and what they need to do to have a financially successful retirement. Among the highlights…

401(k) Balances Remain Low

According to the most recent available data, the median working person between ages 35 and 44 has around $35,000 in 401(k)s…the median 45-to-55-year-old worker has around $78,000…and the median 55-to-65-year-old worker has around $100,000. Those 401(k) figures somewhat understate people’s retirement savings, though, because they don’t include funds in Individual Retirement Accounts (IRAs). When 401(k) and IRAs are combined, the median retirement savings climb to $44,000 for people ages 35 to 44…$104,000 for ages 45 to 54…and $150,000 for ages 55 to 64. When married couples’ retirement savings are considered together, the median retirement savings for households headed by 35-to-44-year-olds is $50,000…for households headed by 45-to-54-year-olds, it’s $119,000…and for households headed by 55-to-64-year-olds, it’s $204,000.

But don’t celebrate too soon if your retirement savings match or even slightly exceed the median figures for people in your age bracket because none of these nest eggs is sufficient to generate a truly substantial amount of retirement income. Example: If that $204,000 median savings for a household headed by a 55-to-64-year-old was used to purchase a joint-and-survivor annuity, it would provide annual income of only around $13,200.

Of course, how much someone earns during his/her career has a huge impact on how much he is likely to save for retirement. Example: Among households headed by 55-to-64-year-olds, the lowest-earning 20% have median retirement plan savings of just $25,000, while the highest-earning 20% have $1.04 million.

Another key factor shaping people’s retirement savings: Whether they work for an employer that offers a 401(k) plan. An impressive 83% of workers of all ages who are eligible to participate in 401(k)s do so—enrollment is especially high when employees are automatically enrolled in plans and must take action to opt out. On the other hand, many people whose employers don’t offer 401(k)s or who are self-employed have minimal retirement savings, or even none at all.

Home Equity is Driving Retirement Gains

So the question is, if the average retirement savings most Americans have falls far short of what they’ll need, how are the majority of Americans—around 60%—expected to maintain their standards of living in retirement? Key factor: Rapidly rising real estate values have left many Americans with hundreds of thousands of dollars in home equity in addition to their retirement savings—home prices have more than doubled in nominal terms over the past 10 years, according to the Federal Housing Finance Agency House Price Index. But there are two big issues with this home-equity–driven retirement security boost…

1. Some people don’t own their homes. Renters missed out on this critical financial boost, which has created a stark housing-driven gap in the retirement outlook. Only about 25% of homeowners are at risk for a financial shortfall in retirement versus about 70% of renters, according to an analysis based on the most recent Federal Reserve Survey of Consumer Finances. Of course, some people who are currently renters will eventually buy homes, but buying a home in the future won’t necessarily overcome this retirement savings gap. Home prices remain well above their historical trendlines, and mortgage rates are no longer low, suggesting that the financial gains offered by homeownership during the coming years could fall far short of those of the recent past.
2. Many homeowners resist cashing in this key asset. When economists calculate homeowners’ retirement prospects, they generally assume that home equity will eventually be converted into income or liquid savings, perhaps by taking out a reverse mortgage…or by selling the house and moving to a smaller home, a home in a less-costly area and/or an apartment. But few retirees actually take out reverse mortgages, and many don’t want to relocate or downsize. Homeowners who don’t tap their home equity face far more daunting retirement prospects than those who do. According to a study by Vanguard investments, 70% of households will fall short of their pre-retirement standard of living during retirement if they fail to take advantage of their home equity.

Social Security is Providing Less Security

Retirement savings provide only a portion of the average American retiree’s income. Some retirees also have defined benefit pension plans or other sources of income, but the largest share of most retirees’ income—especially for low- and middle-income retirees—comes from their monthly Social Security benefits. Problem: The share of retirees’ pre-retirement income that Social Security replaces is shrinking. In 1995, Social Security replaced 42% of pre-retirement income, on average…by 2015, that had fallen to 36%…and it is projected to drop to 30% by 2035. Three reasons for this decline…

1. Social Security “full-retirement age” has been increased, reducing the amount that retirees receive per month and/or forcing them to begin receiving benefits years later.
2. Medicare premiums that are deducted from Social Security benefits have risen substantially. 
3. An ever-increasing portion of Social Security benefits are subject to income taxes since the threshold above which benefits are taxable is not adjusted for inflation or wage growth. In fact, it’s entirely possible that Social Security will replace an even smaller share of pre-retirement income than this estimate suggests—the Social Security system is expected to deplete its reserves by the middle of next decade, which could potentially lead to additional benefit reductions.

How Much Savings Do I Need for Retirement?

Middle-income working households need to save around 15% of their earnings to maintain their standard of living in retirement. That 15% figure includes employer contributions to an employee’s 401(k) plan, if available. High earners should push this figure up to 16%—Social Security replaces a smaller percentage of high-earning households’ income than it does for low-earning households, so high-earners must save a bit more to make up the difference if their goal is to maintain their standard of living in retirement.

Strategies for successfully reaching your retirement savings goals…

• Start early. The younger you are when you begin investing for retirement, the more years you have to save and the more time your investments have to increase in value through the power of compound interest. Example: Someone who starts saving at age 25 can set aside a relatively modest 10% of his earnings each year and likely have enough to retire at 65, assuming typical investment returns and retirement budgets…but someone who waits until age 35 to start would have to save 15% of earnings to do the same…and someone who doesn’t get started until 45 would have to save 27% of earnings, according to Center for Retirement Research calculations.
• Contribute consistently. Most people will encounter at least a few major financial challenges during their working lives. It’s tempting to skip retirement savings during these lean times—but if there’s any way to keep savings for retirement even during these difficult years, it pays to do so. For one thing, not saving during a year often means missing out on tax breaks and other valuable perks. Examples: If your employer matches 401(k) contributions, not contributing at least up to the amount that’s matched is essentially turning down free money for your retirement. And the money you invest in an IRA enjoys tax advantages—but IRAs have annual contribution limits, so if you don’t make a contribution during a year (technically by April 15 of the following year), you can’t simply make a double contribution in a future year to make up for it.
• Retire late. Every additional year that you remain in the workforce brings two big benefits—it’s one more year where you can contribute to your retirement savings…and it’s one year less that you must finance in retirement. Retiring late even can overcome a late savings start—while someone who starts saving at age 45 would have to save 27% of his earnings to have a secure retirement at age 65, he would have to save a much more realistic 10% of earnings to retire at 70, according to Center for Retirement Research estimates.