Millions of Americans face a retirement income shortfall, Vanguard research warns

Millions of people are facing retirement without enough income to live comfortably and may struggle to address the issue.

A proprietary model that looks at retirement readiness has been created by Vanguard for its inaugural retirement readiness report, in which it calculates rates of what it calls "sustainable replacement income," the percentage of pre-retirement income that a worker can replace throughout retirement in 90% of market and mortality scenarios.

It uses four key scenarios across three cohorts — early millennials (ages 37-41); mid-Generation X (ages 49-53); and late baby boomers (ages 61-65) — to determine the gap between the amount of retirement income expected by three key age groups and how much they are likely to need as inferred by the Health and Retirement Study. This gap is used to assess retirement readiness.

Generational readiness is estimated at four points from the national income distribution—the 25th, 50th, 70th, and 95th percentiles.

For example, high-earning, working late boomers are on target to meet their retirement spending needs but low- and medium-income workers are not.

For the lowest-income people in this age group, the study estimates that they will be able to sustain retirement spending equal to 64% of pre-retirement income. But the HRS data suggests they will need 96% of their pre-retirement income.

In contrast, early millennials at the 70^th income percentile should be on track for a sustainable retirement income of 66%, almost in line with the 68% that the HRS data suggests they will need.

DC PLAN CONTRIBUTIONS

For lower-income workers across all generations, workers at the 25th income percentile face a projected retirement savings gap of 32%, whereas high-income families are projected to have a savings surplus of 20% based on expected spending needs.

The participation in employer-sponsored retirement plans has boosted the outlook for younger cohorts.

But the research estimates that Social Security replaces 62% of income for families at the 25th percentile of the income distribution, compared with 18% of income for families at the 95th percentile, who will need to self-finance the shortfall through savings plans and family assets.

“Notably, although many portray younger generations as facing more hurdles for retirement savings, this Vanguard research demonstrates that millennial and Gen X savers have benefited significantly from improved defined-contribution plan design that encourages saving and investing in age-appropriate asset allocations,” said Fiona Greig, global head of investor research and policy at Vanguard.