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.
But US workers — of any single generation — are not a monolithic group. How prepared individuals are for retirement is tied to a person’s savings opportunities and risks, which can vary widely and are highly dependent on their employers.
The Morningstar analysis set out to identify more specifically who is likely to face the smallest risk of running short of money in retirement and why — and those who face the greatest risk.
The best shot at having enough: Participating in a workplace savings plan over time
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.
Only 21% of households who do this will run the risk of falling short financially, Morningstar projects.
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.
“There is a retirement crisis … for those who do not [have] or are unable to participate in a defined-contribution plan,” the researchers wrote.
They project more than half of workers (57%) who don’t participate in a workplace plan could see shortfalls in retirement.
Where you work makes a difference
If you work in the private sector, your employer has to decide whether to offer a retirement savings plan. Large companies typically do, but smaller employers are less likely to. And if you work for a business as an independent contractor or temporary worker, you likely wouldn’t be allowed to participate in any plan.
By contrast, public-sector employees are among the workers who run the lowest risk of running short on income in retirement, Morningstar found.
That’s because they are most likely to have a defined-benefit pension — and they also have a high likelihood of having access to a 401k-like defined-contribution plan, said Spencer Look, associate director of retirement studies at Morningstar and a coauthor of the analysis.
“In many cases, [public sector] workers have a DB pension and an opportunity to contribute to a DC plan,” Look said.
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.
For that cohort, however, the same general principles apply, Look said. “If they have consistently saved and avoided undermining their retirement by, for example, taking pre-retirement withdrawals or cashing out upon job termination, their prospects in retirement are better because they have larger balances, all else equal.”
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.
What’s more, a study done last year by the National Institute on Retirement Security found that income is the single biggest factor in determining who has built savings and who has not. “Retirement savings for Generation X is highly concentrated among the highest earners,” the report noted.
The somewhat better news is that of the Gen Xers who do have access to a 401(k) or similar plan, only 7% elect not to participate, Look noted.
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.
“Over half of working employees lack access to the tax-advantaged retirement benefits that many higher-income earners take advantage of to save. Additionally, as the workforce continues to innovate and more Americans become categorized as ‘gig workers,’ the reliance on traditional employer-sponsored plans causes too many workers to slip through the cracks,” said Pennsylvania Republican Congressman Lloyd Smucker, a co-sponsor of the bill, when it was reintroduced in October 2023.
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.
