The retirement landscape in the United States is shifting, leaving many households at risk of not having enough money to cover expenses during retirement. This is due to the transition from defined-benefit pension plans to defined-contribution plans, putting the responsibility on employees to save for retirement. Gen Xers and Baby Boomers are particularly vulnerable to facing shortfalls in retirement savings compared to Millennials and Gen Z due to having less time to accumulate savings under this new system. The analysis from Morningstar highlights the importance of saving through employer-provided 401(k) plans to reduce the risk of falling short financially in retirement.
Access to workplace retirement plans plays a significant role in determining an individual’s retirement readiness. Those who have access and participate in a 401(k) for two decades or more have a lower risk of running out of money in retirement. However, nearly half of US workers do not have access to such plans, and among those who do, a significant percentage do not participate, increasing their likelihood of experiencing shortfalls in retirement. A retirement crisis exists for those who do not have access to or participate in defined-contribution plans, with more than half of these workers projected to experience financial shortfalls in their retirement years.
The disparity in retirement readiness extends to different employment sectors, with public-sector employees having lower risks of facing financial inadequacy in retirement compared to their private-sector counterparts. The presence of defined-benefit pensions and access to defined-contribution plans contribute to the greater retirement security of public-sector workers. Despite the challenges faced by Gen Xers and Baby Boomers in terms of saving for retirement, there is still time for those who have not been consistent savers to course-correct by taking advantage of tax-advantaged plans and increasing their income.
Efforts are being made at the policy level to improve retirement outcomes for American workers, such as the proposed Retirement Savings for Americans Act. This bipartisan bill aims to create a portable, tax-advantaged retirement savings program for low- and middle-income workers, offering a matching contribution from the federal government. Additional measures like automatic enrollment and target-date funds in 401(k) plans have also been implemented to help younger generations have a lower risk of falling short in retirement. While these changes are beneficial for future retirees, current workers nearing retirement may need to focus on working longer, saving aggressively, and reducing expenses to ensure financial stability in their golden years.
The challenges facing individuals preparing for retirement are exacerbated by income disparities, with higher earners having greater access to retirement savings opportunities. Labor economist Teresa Ghilarducci emphasizes the failures of the individual-directed US retirement system in adequately addressing the needs of workers. While policy changes and legislative efforts are being made to improve retirement savings options, current retirees and those close to retirement may need to rely on personal financial strategies to secure their financial future. Ultimately, addressing the retirement crisis in the US will require a multi-faceted approach that considers the needs of workers across different generations and income levels.
