A new analysis from Vanguard suggests that while the US retirement system has made notable strides in recent years, a significant share of Americans are still at risk of falling short later in life – especially those without access to workplace retirement plans and those in lower income brackets.
The latest edition of the Vanguard Retirement Outlook, released today, estimates that 42% of Americans are currently on track to maintain their lifestyle in retirement, leaving nearly three-fifths facing a potential shortfall.
The research draws on the firm’s proprietary Retirement Readiness Model, which projects future outcomes based on household balance sheets, savings rates, and market forecasts.
Defined contribution plans such as 401(k)s emerged as a critical factor in the report, with participants in those plans being much better off compared to others.
“Workers with access to defined contribution plans are twice as likely to reach their retirement savings goals as those without,” the report states.
Just 52% of Americans have access to a defined contribution plan through their employer, according to Vanguard’s analysis of recent Survey of Consumer Finances data. Coverage is especially limited among workers at smaller companies, where plan sponsorship rates generally lag behind those of larger employers – though that could be changing.
Vanguard’s analysis shows that if all workers had access to a defined contribution plan, the share of Americans projected to achieve retirement security would rise to 61%.
The report also finds that automatic features, such as autoenrollment and automatic escalation of savings rates, have helped boost participation and savings rates among plan participants. About 60% of plans now have autoenrollment, up from just 10% in 2006, and the median participant contributes more than 11% of their income annually.
Generational differences are also pronounced. Vanguard projects that 47% of Gen Z workers and 42% of millennials are on track to maintain their lifestyle in retirement, compared with 40% of baby boomers. One in three Gen Z workers currently have access to a DC plan, compared with one in four baby boomers when they were the same age.
Debt remains a major roadblock for younger generations. At ages 35 to 38, millennials held a median of $12,000 in nonhousing debt – about 25% of their income – compared with $8,000 for Gen X and $6,000 for baby boomers at the same age. Student loans now account for roughly 30% of millennials’ nonhousing debt, up from 10% for baby boomers.
Among baby boomers, the top 30% of earners are projected to be financially ready for retirement, while the rest face annual spending shortfalls of 20% or more of their pre-retirement income. For these lower- and middle-income boomers, Social Security is expected to replace 40% to 60% of pre-retirement income, making it a critical source of support.
The report suggests that “unlocking home equity may be a viable solution to make up for a savings shortfall,” but acknowledges that strategies like downsizing or selling a home can be complicated by market conditions and personal preferences.
The study also models the impact of working longer. If Americans delayed retirement by two years, until age 67, the share of those on track for retirement would increase by 13 percentage points. This improvement is attributed to additional years of savings, higher Social Security benefits from delayed claiming, and a shorter retirement period to fund.
Vanguard suggests that targeted policy changes and plan design improvements could help close the retirement readiness gap, particularly as the Social Security trust fund is projected to be depleted by 2033, leading to a potential 23% reduction in benefits.
The report calls for expanding access to workplace plans, making retirement accounts more portable, and increasing the availability of tailored financial advice – particularly around debt management for younger workers and home equity strategies for older ones.
“By better understanding the factors that influence retirement readiness, we can help build solutions that help more workers achieve retirement security,” the authors write.
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